Namaste to all #Hive and #Leo finance community members. 🙏
I chose to blog on this topic because I myself have faced big unexpected losses in my initial days. That too when technically I used to settle the trades in profits. All that happened because I did not have complete and correct information about the various expenses of trading.
In today's blog, I will try my best to explain each and every expense/fees of trading that not being aware of can negatively impact your overall P&L.
Image by pikisuperstar on Freepik | Edited on canva
First of all, let us understand what trading expenses are:
In simple terms, #Trading expenses are the cost of buying, selling, and holding an underlying asset. Which may vary for different asset classes, depending on their costs, order type, and holding period. And apart from all this, trading expenses can also vary from broker to broker.
Therefore, it is even more important that you ask your broker for details of all trading expenses. Even if some of them are not currently applicable to your account.
Image by storyset on Freepik | Edited on canva
Let us now understand the different types of trading expenses/fees in detail.
Spreads: #Spread is a fee that your broker charges to facilitate your trading. To make it simple, Just look in your broker's app and you will see 2 prices written in front of every tradeable asset, one for buy and one for sell and there will be a difference of a few points in both which is known as the spread. For example, suppose you buy a stock or a forex currency pair at 100 USD that has 99 USD as its sell price. Now if you want to sell the same asset immediately after buying then you will have to bear a loss of 1 USD because its sell price is 99. That 1 USD is called the 'spread' that the broker charges you.
Commissions: #Commissions can be charged in 2 different ways:
Fixed Fee: In which, the broker charges a fixed amount per executed order, regardless of the trade's size and volume.
Relative Fee: Under this model, the fee a trader pays is determined by the size and volume of a trade. This means, the higher the trading volume, the higher the commission.Swap or Rollover Rates: This is the fee for holding a position open overnight which is calculated on a daily basis. This means, the more days a trade remains open, the higher will be its #swap fee.
Margin Rate or Leverage Interest: You may have noticed especially while trading #Forex and #Crypto that your broker offers multiple leverage options such as 1:10. 1:20, 1:50, 1:100, and so on. Now let's assume you have 100 USD in your trading account and you selected the leverage option of 1:10, meaning for every 1 dollar of your own funds, you can borrow 9 dollars from the broker. This means with your 100 USD trading account you can buy assets worth 1000 USD. Now if this $1000 trade moves 1%, it will be equal to 10% of your funds of $100. This is why they say "#Leverage is a double-edged sword" If the price moves in the opposite direction it can potentially wipe out your entire investment.
Conversion Fee: If the base currency of your account is different from the currency of the instrument you are trading, then the broker might charge a currency conversion fee. Which also varies from broker to broker.
- Deposit and Withdrawal Fee: As the term suggests, these fees are charged every time you #deposit and #withdraw funds in your trading account. However, most brokers do not charge anything for depositing funds nowadays because they want you to invest more freely, But many of them still charge withdrawal fees.
- Account Maintenance Charges (AMC): Apart from charges for opening a trading or a demat account, you might also be required to pay account maintenance charges. However, nowadays some brokers are also offering zero account maintenance charges, that too for a lifetime. But here I feel that if you are a frequent trader then you should not think too much about AMCs if you're paying less and getting a better platform and services.
Above are the details of all the necessary trading expenses about which you need to have correct and complete information so that you can freely plan your perfect trade setups. Because not having complete information about these trading expenses can have a big impact on your bottom line.
So don't forget to ask your broker for details of all trading-related expenses. Even if some of them are not currently applicable to your account.