If you are new to the Forex market then there is one feature that will invariably hold your interest and make you want to invest in it and that is the promise of no exchange fees. For a trader who has just joined the bandwagon and is yet to settle himself, it is a great piece of information to be able to start trading without spending money on transactions. However, you might also wonder how your broker will be paid. If you are not paying the money, who is?
The forms of commission
Forex brokers make use of three forms of commissions. The first form of the commission is known as a fixed spread, the second form is known as a variable spread and the third form of commission happens to be a certain percentage of the entire spread. You might instantly take a liking to the fixed spread because it seems doable but before you choose this option, do understand that there are other factors involved.
Ask Price and Bid Price
The difference between the bid price and the asking price is what is popularly known as the spread. It is the difference in price between what the market maker might pay you because you have bought the currency and the price at which he will sell the currency to you. This spread is the broker’s commission. A broker could charge a commission as well as a spread, depending upon the type of trade.
If the spread is variable then it will depend on the movement of the market. Sudden market movements such as changing interest rates etc could change the spread as well. This could work in your favor or could go against you, depending on what your position is. If the market conditions are volatile, you might end up paying way more than what you would have if your broker had a fixed variable spread payment method.
Commission based payments
If you have a broker who is being paid on the basis of commission then the size of the commission will depend on the things that the broker offers. If he is offering you good services then paying that extra bit of commission is worth the trouble.
Whatever the mode of payment, you must ensure that the broker you have hired has been in the business for a long time and has enough experience in the Forex market. You should also take a note of the experience that he might have had in terms of managing a firm.