By Matthew Vint
In Forex, traders and investors don't typically have to worry at all about payable commissions that can can increase trading costs. However, there are definitely costs associated with currency trading that every trader and investor should understand and be aware of.
There are two main types of trading costs associated with Forex trading, are "spreads" (the differences between the buy and sell prices of currencies, which are charged instead of commissions) and "rollovers" (which involve overnight holding of orders).
Bid/ask spreads are very common in Forex trading and brokers use these spreads to make their money. The broker will make money whenever you buy or sell currencies. You buy or sell currencies relative to the broker's spreads. The broker will make money by selling you a currency at a higher price, this price being relative to the price at which the same broker will be happy to buy back the same currency from you, for your original currency. It might sound complicated at first, but it isn't in reality.
The second Forex trading cost, is known as the "rollover". This fee applies only when the major markets have all closed and when a Forex position is put into practice. Traders are investors typically wait for a few hours before receiving their destination currency. This means that they lose any interest that they could have made by having that currency safe in their bank account. So, rollover fees simply take into account the differences in interest rates of bought and sold currencies.
If you buy into a currency with a high interest rate, you will actually be paid the rollover amount when the next trading session begins. Likewise, if you buy into a low interest rate currency, you will be charged the rollover amount.
Margin trading in the stock market, essentially involves buying stocks with borrowed money from Forex brokers. However, margin trading presents a cost that is even more predominant in Forex than it is in stocks. Forex trading generally requires very high amounts of leverage.
Leverage is when you use borrowed capital for an investment in the hope of making profits greater than the payable interest on the borrowed capital. Forex trading requires high leverage due to the size minimums placed on certain Forex trade types. So, traders and investors that do not have enough money must trade via financing. Leverage ratios of up to 100:1 are common in Forex trading, which means that you only have to own 1 single dollar for every 100 dollars invested. Although this means you can make much profit from a small investment, you can also make many losses, as it essentially increases the risk of the trade. You must learn to try and work leverage to your advantage when currency trading.
In conclusion, costs are actually kept to a minimum, since the FX market is very tough and highly competitive - the trading costs reflect this tough competition, as Forex brokers compete with each other a lot. There are only two real costs that you need to worry about, and if you go to a good broker, you won't have to worry at all as even the spreads tend to be unnoticeable and insignificant. You can also avoid rollovers by only trading when the market is open, however in general, rollovers are nothing to worry about anyway.
How Forex Trading Works is a resourceful website that serves to deliver free, online content relating to Forex trading, to anyone and everyone.
Article Source: http://EzineArticles.com/?expert=Matthew_Vint
There are two main types of trading costs associated with Forex trading, are "spreads" (the differences between the buy and sell prices of currencies, which are charged instead of commissions) and "rollovers" (which involve overnight holding of orders).
Bid/ask spreads are very common in Forex trading and brokers use these spreads to make their money. The broker will make money whenever you buy or sell currencies. You buy or sell currencies relative to the broker's spreads. The broker will make money by selling you a currency at a higher price, this price being relative to the price at which the same broker will be happy to buy back the same currency from you, for your original currency. It might sound complicated at first, but it isn't in reality.
The second Forex trading cost, is known as the "rollover". This fee applies only when the major markets have all closed and when a Forex position is put into practice. Traders are investors typically wait for a few hours before receiving their destination currency. This means that they lose any interest that they could have made by having that currency safe in their bank account. So, rollover fees simply take into account the differences in interest rates of bought and sold currencies.
If you buy into a currency with a high interest rate, you will actually be paid the rollover amount when the next trading session begins. Likewise, if you buy into a low interest rate currency, you will be charged the rollover amount.
Margin trading in the stock market, essentially involves buying stocks with borrowed money from Forex brokers. However, margin trading presents a cost that is even more predominant in Forex than it is in stocks. Forex trading generally requires very high amounts of leverage.
Leverage is when you use borrowed capital for an investment in the hope of making profits greater than the payable interest on the borrowed capital. Forex trading requires high leverage due to the size minimums placed on certain Forex trade types. So, traders and investors that do not have enough money must trade via financing. Leverage ratios of up to 100:1 are common in Forex trading, which means that you only have to own 1 single dollar for every 100 dollars invested. Although this means you can make much profit from a small investment, you can also make many losses, as it essentially increases the risk of the trade. You must learn to try and work leverage to your advantage when currency trading.
In conclusion, costs are actually kept to a minimum, since the FX market is very tough and highly competitive - the trading costs reflect this tough competition, as Forex brokers compete with each other a lot. There are only two real costs that you need to worry about, and if you go to a good broker, you won't have to worry at all as even the spreads tend to be unnoticeable and insignificant. You can also avoid rollovers by only trading when the market is open, however in general, rollovers are nothing to worry about anyway.
How Forex Trading Works is a resourceful website that serves to deliver free, online content relating to Forex trading, to anyone and everyone.
Article Source: http://EzineArticles.com/?expert=Matthew_Vint
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