In order to run the trading business, the traders are required to pay the cost for executing the activity which is mainly known as the cost of trading. The costs that are required for the process should be divided into two parts, those that are compulsory, which means that every trader has to pay a certain amount of money for the activities that are 100% required for the trading process. Other than the compulsory costs, there is also an optional cost, which a trader can decide on its own, whether he/she wants to upgrade to the news services, technical analysis services or just for the better and faster connections.
The compulsory cost consists of the commission that all the traders have to pay for their brokerage companies that are providing proper services for them. The cost of the commission in this case is different and depends on the company you are connecting with. However, at the end of the trading session, the numbers are quite significant which was before overlooked by many of them. Sometimes, the factors such as mismanagement or underestimating the costs might result in an unfavorable trading process and the result will not be as beneficial as it was thought to be.
One of the most common types of costs is spread and commission, which does not matter how successful you are on the market, still needs to be paid.
The spread costs
The term “spread” is often misunderstood and to put it simply, this is the cost that the brokerage company requires from the trader to pay in order to give the ability to trade. The company will provide the trader with the two prices for each currency pair that are offered on their trading platform: the bid price, which means the price to buy at, and the asking price, which is the price for selling.
The difference between those two prices is also known as the spread, which is charged by the brokerage company, which keeps the company active on the market. Simply, the spread is the cost for the trader to trade and the way of paying the broker in return. The lowest price that the company is willing to pay to sell the instrument to you is the asking price and the highest price for purchasing an instrument from you is known as the bid price.
Other than the fact that brokerage companies are providing the traders with the help that is quite beneficial, trading costs are sometimes the obstacles for beginners to start trading. In order to increase the trust between the company and the client, Milton Prime has implemented the trading costs calculator in its platform that has increased the efficiency of the work. The main aim is to lower the commission fees that will make the trading process more beneficial for the clients for which the above-mentioned simulator plays an important role.
There are a number of factors that the spreads are depending on, one of them being the market volatility and currency pair that is traded. Variable spread costs are taking place during the high volatility.
The additional commission may be changed by certain brokers for managing and executing the deal. Due to the fact that the majority of their capital is generated from commissions, the broker may simply increase the spread by a portion or not at all under certain cases.
The commission fee is very similar to the spread, which means that this is the cost that the trader is charged on every trade. This is why the profit of the trade should be as much as possible in that case, to cover the commission fee. Forex commissions exist in two different forms:
- Fixed Fee – under this arrangement, the broker charges a set fee regardless of the size or volume of the deal. For example, a broker may charge 1$ commission per performed transaction with a predetermined cost, regardless of the amount of the transaction.
- Relative Fee – the most typical method for calculating the commission is the relative fee. A trader’s dee is determined by the magnitude of the deal. For example, the broker may charge a certain amount per million in traded volume. To put it another way, the bigger the trade volume, the larger the monetary value of the commissions are.
Other than the official commissions and spread, some brokerage companies are having hidden fees. Inactivity fees, monthly or quarterly minimums, margin expenses, and costs that are connected with dealing with a broker on the phone are some of the things to watch out for.
A trade should also analyze their personal patterns before deciding which compensation plan is the most cost-effective. Traders that deal in large volumes, may choose to pay simply a flat charge to keep expenses down. Smaller traders with lower volumes may choose a commission based on the trade size option since it results in lower relative fees for them.