Commissions go hand in hand with many popular trading instruments. We pay realtors a commission when we sell our house. A financial advisor makes a commission when you buy an insurance policy or shares of a mutual fund. Stockbrokers make commissions on selling stock or simply placing the order. With the foreign exchange market, however, traders do not pay a commission to trade.
The foreign exchange market, or FX market, is an over the counter market. An over the counter market is one where trades occur directly between two parties. Trades are processed through an electronic network or initiated over the telephone. There is no exchange floor and hence no "middleman" to go through and pay commission to.The cost of establishing a trade is the spread between the asking price and bid price. In the case of the major currencies--US Dollar, Canadian Dollar, Australian Dollar, British Pound, Euro, Swiss Franc, and Japanese Yen--the spread can be as little as three pips. A pip is the smallest increment--.0001--a currency can move. In order to make a profit, you need to make up the spread. There are some peripheral expenses involved with Forex trading, however. In order to take advantage of the real time market data online dealers provide you need a high speed internet connection. Beginners will also want to subscribe to a commentary service that helps with market analysis and trading techniques. If your trading platform does not include a charting service, you will need to subscribe to a service that provides charts as well.
