How the Forex Market Works and Why you Don't Have to Pay Commissions

by Andrew McGuinness     Jul 16, 2019

The Forex trading market vastly outshines the equity and bond markets of the United States, trading an average of $1.9 trillion every single day- that's a lot of cash. If you're a beginner investor, you may feel intimidated by the size of the Forex market, or believe that it's too complicated or volatile for a first-time investor to enter. However, the truth is that the Forex market is on essence just as simple as trading on the American stock exchange- and you can enjoy huge profit margins and benefits if you are able to time your currency trading correctly and make smart choices. In this article, we'll be going over what exactly the Foreign Exchange Market consists of, and we'll help you learn all about why you don't have to trade on commissions like you would when trading stocks and bonds.

What is the Forex market? Simply put, foreign exchange trading (most commonly referred to as "Forex trading") is changing one currency into another and then trading back again when the currency that you hold is more favorable. For example, let's say that your native currency is the American dollar- you may want to sell your dollars in exchange for Japanese yen in hopes that the value of the yen will rise against the dollar. This does not mean that you are betraying your home currency or you are ready to pack up everything and move to Tokyo; fluctuations in currency value are common, and if you time everything correctly, you will be able to eventually sell your yen holdings back for the US dollar when the value of the yen makes the exchange favorable to you. While this may seem like a simple strategy, investors have made millions of dollars by correctly guessing which currency pairs will rise and fall and investing their money accordingly.

Do I need a broker to trade on the Forex market? Yes. Just like if you were trading on the American stock market, you will need a broker to help you facilitate transactions. When you trade on the Forex market, you do so on a margin- this just means that you need to put a "down payment" guarantee to your account for a broker to begin trading for you or accepting your trades and putting them through. Most brokers set their margins at a rate of 3-5%; this means that if you would like to start trading at $10,000, you'll need to give your broker a "down payment" of anywhere from $300 to $500 to open your account before you make any transactions. This is not a commission price- this is simply the price that you must deposit into your account to begin trading. One of the best things about trading on the Forex market is that you do not pay commissions on your transactions- meaning that you can make a large number of trades on a daily basis without paying out for every trade like you do when trading stocks on the American Stock Exchange.

How do brokers make money if they do not charge commissions? When you begin to trade currencies, you will notice two prices listed for each exchange: a "bid" price and a slightly higher "ask" price. Brokers are able to quickly make up their money when trading by keeping the difference between the bid and the ask price, which varies throughout the day depending on how hot the currency pair trade is. This is also known as the ‘spread’.

Forex Trading is a rapidly growing market- and now is an excellent time to learn more and get a slice of the pie. By creating a trading strategy and sticking to the industry-standard trade practices, you can use smarter speculation to walk away with more money in your pockets.

Get unlimited access to our Learning Center,
Broker Insights and Exclusive Promotions for Free!