Commissions, Spreads and Trading Costs
Like any bussiness, there are some costs will involved while these may be much lower than they used to be, it is important to understand what those are. Let’s start by looking at forex trading, something that most of us investors are pretty familiar with.
In forex trading most investors will have a trading account with a broker somewhere and will have investment funds deposited in that account. The broker will then execute the trades on behalf of the account holder and in return for providing that service the broker will want to be compensated.
Typically the forex broker will earn a commission for executing the trade. They will charge either a fixed dollar amount per trade, or a dollar amount per share or a scaled commission based on how big your trade is and it called spread.
The way they do that is by charging the investor a spread that is the difference between the bid price and the ask price for the currency being traded. The broker will add this spread onto the price of the trade and keep it as their fee for trading. So, while it isn’t a commission per trade, it behaves in practically the same way.