At the beginning of their career traders have to consider a lot of things. However, due to being excited about making their first profit through currency exchange, novices often rush through several crucial stages. As a result, multiple brokerage fees might sneak in and offset the overall income. Today we discuss what are brokerage fees and how to properly account for them to become a successful Forex trader.
What Are Brokerage Fees
Just like the trader, brokers aim to earn income. Since brokerage firms are service providers that offer a range of products, tools, suggestions, and so on to their clients, it’s only fair that they get reimbursed for that. Plus, a lot of instruments that brokers provide for free actually cost them quite a lot of money. For example, you’ll gain access to the MT4 trading platform for free, while the broker pays off the license to use that software.
The historical broker charges were very different from what is a brokerage fee today. Trading was exclusively accessible to a very limited group of people, therefore the fees those people charged could be very steep. However, with the introduction of online trading, brokerage fees reduced significantly.
Although the brokers still pay for a number of things, like real-time data feeds, software licenses, and the promotion of their services, those prices are relatively bearable and balance out with the help of each brokerage fee. So, the real answer to what is the brokerage fee and why do we pay it — for the brokers to continue servicing the traders.
For the most part, the reputable brokers are very transparent about every brokerage fee. But, of course, there are some less-respectable broker companies out there who might dump an entire load of hidden charges on their clients. That’s why it is crucial to know what a brokerage fee is charged for and exactly how much it will cost you.
The Types of Broker Fees
A lot of brokerage fees are common for every broker and the fact that every broker charges them kind of confirms that there is no way around. What will be different, however, is the specific amount the broker is asking for with each brokerage fee. Depending on the range of services and the size of the broker’s company, the market resources come to them at different price levels. These prices are then directly reflected in the brokerage fees.
Then, as previously mentioned, there are also the brokers who might give you a wrong impression of what is brokerage fees and charge for every small thing without giving too much explanation. It’s critical for new traders, as well as for established pros, to carefully screen the terms and conditions section of any new agreement they commit to. The idiom ‘the devil is in the detail’ perfectly applies to this case.
Now that we have a general understanding of what are brokerage fees, it’s time to get a little more specific. Let’s take a closer look at the most common and not-so-common brokerage fees to know exactly what they are and how to address them.
Brokerage Fee on Trading Spreads
A spread in trading is the difference between the bid (sell) and ask (buy) price quotes. The very common misconception is that brokers charge spread in order to gain income. However, in reality, the spread is not exactly a brokerage fee per se, but rather a fee that a broker pays to market makers in return for providing the quotes. The majority of brokers transfer the charge to the traders, as they are the ones who actually need the information.
Spread brokerage fees vary from one service provider to another, as well as from one trading instrument to another. For example, the less popular emerging markets’ currencies would normally have higher spreads than the major pairs, such as USD/EUR or GBP/JPY. The high spread can indicate two general conditions: increased volatility or low volume during the unpopular trading hours.
The only way to find out what is brokerage fee lowest value among brokers is to manually compare the available options. As a rule of thumb, the spread around 1 pip can be considered low. Another thing worth pointing out is that the spread reduces with the upgrades of trading account types. This way, the spread in a micro account can be over 2 pips and for the standard account less than half a pip with the same broker.
Finally, although the lower spreads definitely sound attractive, they shouldn’t serve as the main factor in the broker selection process. Some brokers might compensate for a low spread with other brokerage fees and hidden charges. That’s why while choosing the best broker for your needs it is important to look from a variety of angles, spread size being one of them.
Swap Trading Fees
Another very common brokerage fee is a swap. Although swaps are among the fee category, they can actually be both added and withdrawn. As the name partially suggests, a swap is a simultaneous turnover of the trade that involves closing and reopening it within mere seconds. This process happens when a trader wants to carry a position over to the next day.
Depending on the type and the size of the position, as well as on the day of the week, and several other factors, swaps can be either positive or negative. The detailed swap breakdown will be described under the broker’s contract specifications. It’s very important to go through that section carefully since swaps can quickly add up and visibly eat into the profits.
Of course, many traders don’t have to worry about swap brokerage fees. For example, day traders, including scalpers and some swing traders will always close all positions within the course of one trading day. But the position traders and large-scale swing traders, who hold some positions open for weeks and even months must pay close attention to the way swaps affect their trading process.
Trading Commission Brokerage Fee
There is a range of commissions that are somewhat similar to what are brokerage fees. For instance, some brokers might offer their clients access to direct communication with the market makers, which are traditionally the large financial institutions and banks. On the one hand, the charge for every transaction in this case increases. On the other hand, however, spreads can be extremely low, which eventually balances out the overall charges.
Other than that, a lot of well-established brokers allow commission-free currency trading. But it’s worth mentioning that the same brokers might charge a fee for assisting with non-currency instruments, such as share CFDs, ETFs, or cryptocurrencies.
To have a full understanding of what type of commission the broker might subject you to, take your time reading the contract. Because while some brokers will gladly demonstrate what is brokerage fees they charge and why, others will go to great lengths to hide the exact amount of charges that come along with their services.
Additional Brokerage Fees
Spread, swaps and commissions are part of the deal with pretty much any broker out there. Then there is also a slightly more advanced brokerage fee category that finds representation in wide service range broker companies. For the most part, these charges will bring along useful services, however, in some cases, they are just a way for the broker to cover a portion of their expenses.
Brokerage Fees for Currency Conversion
In the scenario where a trader is looking to transfer funds between two accounts with different base currencies or store the gain in domestic currency instead of the one they use as an instrument, conversion fees might apply. Just like any other charge, the conversion brokerage fee can vary in size, although it is often lined up with the spread of that particular currency pair.
One of the ways to minimize the conversion costs is to open a set of different base currency accounts with the same broker. Not all brokers offer the option to have several accounts at once, so make sure to inquire about the possibility beforehand. In case your broker doesn’t provide such a solution, you can also double-check what is a brokerage fee on conversion with them and make a decision based on that number.
Withdrawal Brokerage Fees
Withdrawal is most probably the best part of currency trading: you did a great job conquering the market and here is your reward. However, there is a tiny drop of bitterness also known as the withdrawal brokerage fee. Most reputable brokers wave off the withdrawal and deposit charges, except for credit and debit card deposits.
The card deposits may cost anywhere from 5 to 10 percent of the transfer, and they are necessary to cover the price of the card processing. Another valid point to keep in mind when getting to know the broker’s withdrawal policy is the amount of time it normally takes for every fund transfer method.
Luckily, thanks to modern technology most payment methods are done within a matter of a couple of minutes up to a few hours. But once again, the bank transfers by nature are more complicated. Even though the broker will process the withdrawal at the same speed as for the online wallet, banks can take up to two working weeks to complete the task. So, be cautious about both the withdrawal brokerage fees and the specifics of your chosen transfer channel.
When we discussed the spread charges, you learned that market makers are the ones that provide the price quotes for the instruments. The makers of the market provide liquidity to all the traded assets and therefore have the power to announce the price. Due to the sheer variety of trading instruments, there are several market makers every broker has to reach out to.
The stock exchanges such as New York or Nasdaq provide quotes on shares, large banks like Deutsche Bank — on currencies. In exchange for the information, they will ask for a fee, usually less than $10 monthly. These $10 can quickly add up though, especially considering the number of data providers out there.
To take off the cost load of live price quotes, some brokers partially or fully transfer the quotation fee to the clients. As a rule of thumb, brokers who don’t charge for real-time data are very open about it, meaning that they will advertise the fact that you get the most recent data with no fees. And if you can’t find the answer — ensure to ask.
The inactivity brokerage fees are very common. Brokers tend to keep their client bases as involved as possible, so the inactivity charge makes a lot of sense. Of course, there are circumstances when a trader doesn’t have enough time or resources to continue trading. In this case, it’s best to either freeze or close your account altogether. You can always get back to trading later on after regaining a sufficient amount of energy.
Another solution to avoiding inactivity brokerage fees is to keep up the trading by opening small positions. Any day trading strategy can do the job: just get in for a couple of minutes to process an insignificant trade and close it after reaching a gain of 5 to 6 pips. Who knows maybe one of the times you come to the market just to check in will turn into a pretty profitable session and re-awaken your trading enthusiasm.
To understand the nature of what is the brokerage fee for account maintenance, you should think slightly outside of your actual trading account. A broker is very rarely an individual. In the majority of cases, it is the entire team of market professionals who take care of a variety of tasks from research and analysis to tech-support and customer communication.
Pretty much everything the broker’s team does is reflected in your account: the price quotes, the learning materials, the platform access, and so on. Now, institutional brokers, such as banks, would normally charge an insignificant monthly fee to balance out the cost of account maintenance. However, the so-common online brokers generally take care of such fees in order to simplify the total charges for the trader.
The same as with account maintenance, it is the question of the broker’s perception of customer appreciation. In simple words: the brokers who are trying to milk every penny will charge for everything they can, while the ones who focus on the bigger picture won’t.
Metatrader 4 is a unique trading platform that elegantly combines technological sophistication with user-friendly simplicity. It makes perfect sense that getting a full license to the original software can cost quite a sum of money. And it does: brokers pay around $100,000 initially to get all the necessary components and then a negotiated monthly fee of several thousand, depending on the support package they choose.
In fact, a lot of traders who are trying to become professional brokers pause when they see the price of getting a licensed trading terminal. Instead, they take a different approach and represent brokers through a partnership, for example.
Many inexperienced brokers will also try to transfer the cost of the MT4 to their traders. But this isn’t exactly fair to the traders. That’s why you should always look for a broker who provides access to the platform at no charge. After all, there are many other brokerage fees to think of — the platform price shouldn’t be one of them.
Brokerage Fees for Short-term Trading Strategies
The short-term traders get affected by the brokerage fees the most. Because a position held throughout one day won’t always bring high profits, traders have to open several positions at once or one after another. Needless to say, the spread charges will quickly add up and sometimes almost completely wipe out any profits.
One of the ways to solve the spread issue is to find a broker with the best spread charges and then make sure to select the correct account type. Then, there are also currency pairs and trading sessions that can be characterized by lower spreads. This means that traders always have the possibility to optimize their trading process and pay less in brokerage fees, as long as they take time to test different setups.
Test the Brokerage Fees in Demo
A demo account is a wonderful tool for anyone who is trying to make a trading-related decision. It might be hard to imagine how spreads and swaps affect the account balance without seeing it first hands. But it also won’t be wise to waste the money on seeing how brokerage fees apply during trading. Demo accounts can help with this.
Of course, since there is no real money involved, traders who train in demo won’t be able to experience the effects of conversion fees or withdrawal fees. But the rest of the simulation, including spread and swap charges, will be very accurate. In general, a demo account is great for choosing among trading strategies, techniques, and instruments. There you have enough space to experiment and make healthy mistakes before settling on one specific plan.
As a bonus, you will get to see just how much a spread can look like after it applied to more than one position. Same for the swap: as you know it can be both positive and negative, so holding a pretend position in the demo for an extended period of time won’t necessarily drown your profit, but it’s still really useful to see how it works.
The best thing about the demo accounts: it’s free and you can use it for as long as you’d like. Whether you are trying to check what is brokerage fee effect on the trading process, test a strategy, or develop your own approach — there is no better solution than a demo account.
How to Choose a Broker With the Best Brokerage Fees
The brokerage fees might be unpleasant, but there is no way to avoid them altogether. So, the best thing you can do is focus on choosing a broker who will create the most comfortable environment for your trading.
Start by evaluating the amount of information the broker is willing to provide for free. The chances are, when a trader is considering to start trading online, they already have access to all the possible info on trading. So, there is absolutely no reason to charge for something that’s already free. Of course, there is a certain amount of effort that goes into gathering all the materials together and presenting them in the most easy-to-follow and effective way. But as long as the broker is invested in trader’s success that will gladly educate for free.
Then look at the tools and resources the broker is offering to use during trading. And especially pay attention to the brokerage fees that come along. As you know from this article, a lot of reputable brokers will cover the charges for platform fees, account maintenance, and a lot more. On top of that, many old-timers of the broker community also like to treat their clients to a range of bonuses. Just make sure to always read the fine print and ask questions when a certain brokerage fee seems unclear.
Finally, take a look at your own skills, knowledge and expectations. A large portion of your trading experience depends on what kind of strategy you will implement and how much time you will spend trading. There are brokers out there who only deal with professional traders, while others specialize in mentoring the novices. Then there are also brokerage firms that cater to both newbies and pros. Depending on the broker’s client base orientation they will offer a specific set of tools and services to support the traders.
Once you found a broker that offers a plenty of things for free, ensures to provide sufficient data sources and grants access to the most advanced tools at the market — it’s time to trade. Well, almost. First, you’ll have to choose the best account type to accommodate your requirements.
Low-brokerage Fee Account Types
You can start trading Forex with as little as $10, but it is important to remember that the lower is your initial deposit the higher your trading will cost. Sounds a little counterintuitive, but that’s the reality. So, in order to optimize your trading spending and earnings balance, consider beginning your currency exchange journey with something heavier, at least $100, for example.
The more you invest initially the wider is the range of opportunities you’ll get. From low spreads and bigger lot sizes, to an unlimited instrument selection and priority position execution, upgrading your account type is nearly always beneficial. Of course, going all in is not always smart, which is why it is important to soberly evaluate your capabilities and consult the broker’s team on which account type will suit you best.