In any business that you go into, you’ve got certain costs: Rental costs, marketing costs, administrative costs, etc.
In the trading business, commissions are the transaction costs. We pay it to the broker and that’s how the broker makes money.
How Do Brokers Charge Us for Their Services?
There are three kinds of brokers, but I divide them into two groups:
- Market Maker / STP Brokers
These brokers charge a mark-up on the market’s bid/ask spread —whatever the bid/ask spread is, they’ll quote you one or two pips higher.
For example, if the market is quoting at 1.2356, they’ll quote you at 1.2357. This one extra pip goes to the broker and that’s how they make money.
- ECN Brokers
These brokers charge a fixed commission. The lowest commission I’ve seen is the one I’m using which is halifax.com.au. They charge $3.50 per lot. So for every one lot that I trade, they charge me $3.50 to buy and $3.50 to sell.
When you open and close a position (buy and sell), it’s known as a round trip. The total commission I pay per entry and exit per lot is $7.