Most 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.
Forex
Broker Info provides detailed information on forex brokers,
forex trading and market makers, and other forex-related topics.
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