Forex - Understanding Commissions, Spreads, And Trading Costs By Ferris Malone At Isnare.com Ezine Articles

The foreign currency market, also known as the Forex market, is turning into one of the most successful and popular investment methods. Many new traders are flocking to the Forex market because of its tremendous potential for money-making. Experienced traders are seeing its worth also and turning to it.

Forex offers many advantages over its competitor investments. A few of those benefits are:

1) Great leverage. In the Forex market the leverage can be 100:1 or even 200:1!

2) The trading costs are low.

3) Amazing liquidity. Nearly 2 trillion dollars are traded on a day to day basis. This is larger than any other financial market in the world.

4) There are no commissions! But we will talk about this more later…

However, currency trading, like any form of investment, does require some costs. That is what I want to concentrate on today.

Paying The Price

Though the costs are much, much lower in the Forex market than in most others, it is crucial to know what they are and how to manage them. In order to understand the profit of “no commissions”, let’s compare the stock market to Forex.

In the stock market, you need to have a broker who will have control over your investment funds and trade for you. But of course the broker will require a percentage of what you earn. Normally, the broker will earn commissions for each trade executed. These commissions can be charged for both selling and buying stock, therefore costing you much money.

With Forex trading, the brokers don’t require commissions. And, except for a few brokers, this really is true.

No Broker - No Problem

Also, the great thing about Forex is not just that brokers don’t require commissions, but that you don’t require a broker! Your capital can be in your own control and you can made decisions on your own. Though the responsibility sounds scary at first, it really is quite liberating. With your own future in your hands, you can trade confidently and successfully and your own freedom can be a great motivation.

But if you do need to use a broker, there are some things that you should understand. First of all, instead of charging commissions, the brokers will charge a “spread”. Though it is not strictly a commission, it is similar in some ways.

However, unlike commissions, spreads are only charged for one side of the transaction. This way you don’t have to pay to buy and sell Forex. Usually the spread is only required for buying Forex units.

Spreading The Wealth

Spreads will differ from broker to broker. They can change on account of what currencies you are trading and what kind of account you have. The more popular the currency, usually the less the spread will be. The currencies that are less commonly traded (and therefore have higher risk) will require higher spreads.

Be sure to decide first of all on what currencies you will be trading and to make sure what the spread will be for those certain Forex units.

All in all, it is very important to know what the spread will be before you trade and invest your money. Though brokers will still cost you money in the Forex market, it is dramatically less than in any other financial market. This is one of the great advantages of Forex trading.

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