Material costs of trading on the market

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In the financial markets, you can trade stocks, futures, options, commodities or currencies. However, before choosing one or more trading instruments, it is worth asking about the costs that go along with this trading.

Types of trade costs

Trading costs will depend on the trading instruments and the market in which they are traded. The lion's share of the costs will be the broker's fees. There is nothing surprising in this, because this is the broker's income.

All trade costs can be classified as follows:

Commissions
Slip
Spread
Fee for the trading platform
Other expenses

Commissions

The commission is charged by the broker as a percentage of the size of the transaction you make. The commission can be fixed, for example - 1% of the size of the transaction. For example, if you buy shares for 10 thousand dollars, the broker will charge you 1% = 100 dollars. The commission can also be proportional. For example, if the transaction is up to 10 thousand dollars the commission will be 50 dollars, but if the transaction is between 10 and 20 thousand dollars the broker's commission will be 100 and 80 dollars.

Slippage

Slippage refers to the difference between the price indicated by the trader in the order opening request and the actual price at which the order was opened by the broker.

For example, a trader sends an order to open a buy 1 lot in the GBP/USD pair at the price of 1.6174. During the broker's processing time the price rose to 1.6184, and the order was opened at this price. The trader's loss was 10 pips, which at the leverage of 1:100 is $100.

Spread

The spread is the difference between the bid price and the ask price, also known as the buyers' and sellers' prices. The ask price is always higher than the bid price. For example, for the currency pair GBP/USD the bid price is 1.61871, and the ask price is 1.61900. Respectively, the spread on the currency pair GBP/USD will be 1.61900 (ask) - 1.61871 (bid) = 0.00029 or 29 points for a five-digit quote.

Fig. 1. Market Watch window with bid and ask prices of the MetaTrader 4 trading platform.

This means that when you buy 1 lot of the currency pair GBP/USD, the broker will not sell it to you at the market price (1.61871), but at the market price + the spread, in this case - 29 points, that is 1.61900. With a leverage of 1:100 the costs of the transaction shown in the example will be $29.

Fee for the trading platform

Some brokers have a monthly fee for the use of their usually highly specialized trading platform. The most common among currency traders MetaTrader 4 trading platform is provided by brokers absolutely free of charge.

Other expenses

The number of other expenses depends on the trader's intentions and trading style. These expenses range from buying literature to buying Expert Advisors, trading signals and paying for VPS servers.

Some traders prefer to ignore these costs, accepting their inevitability, although they greatly affect the amount of profit, but a serious attitude to trading, you should strive to minimize these costs, getting the most out of each penny invested in the trade.

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