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Forex Broker Commissions
from: Eddie TobeyMost forex brokers do not charge commissions. GFT Forex Brokers,
like other forex brokers, are compensated by revenues from their
activities as currency dealers, including proceeds from buying,
selling, converting and holding currencies, interest on
deposited funds, and rollover fees.
Many may wonder how brokers work without commissions. The forex
dealer is like a middleman. Let's consider the case of a bread
middleman. He buys bread at a "wholesale" price and he sells it
at a "retail" price. So if one is a baker, he can ask the
middleman how much he would buy his bread for. Let's say the
middleman quotes $1, so he's willing to pay $1 per loaf.
On the other side of the equation, let's say you just finished
his last slice of bread, and you needs a new loaf. So you call
up the local middleman, and ask him how much he's willing to
sell you (a customer) a loaf of bread for. And he quotes the
baker $1.25. That sounds reasonable, so you tell him to drop one
off for you.
In this example, the bread middleman didn't charge you a
commission to either the baker or you, the customer. Instead he
bought at one price and sold at another. He will let you buy
from him at $1.25, and let you sell to him at $1. So every time
the baker has bread to sell, he checks the middleman's sell
price. And when you want to buy a loaf of bread, you check the
buy price. In trading, this is known as the "bid" and "ask". The
bid is the price you can sell at, and the ask is the price you
can buy at.
Considering forex broker commissions, the forex dealer will let
the trader buy from him at 1.1971 and will let the trader sell
to him at 1.1967. The difference 0.0004 is known as the spread.
And this spread is where the forex "middleman" makes his money.
If the trader were to buy at 1.1971, then the instant the trader
buys, he is "down" 0.0004, because if the trader wanted out of
the trade, the best price he could sell it for is 1.1967. So as
the forex dealer takes varying trades from people, each buying
or selling, he can make money from this price gap. Each minimum
increment, 0.0001 is referred to as a "pip". So the spread in
this example is 4 pips. In terms of dollars, for a forex
contract of $100,000, this transaction would cost you $40
($100,000 x 0.0004) or 4 pips. So the trader will find that some
companies will advertise a spread of 3 pips on some currencies,
usually ranging up to five on others. In forex trading, the
tighter the spread is, the better.
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