Forex Spreads & Commissions Tips

Forex Minimum Investment Requirement

Forex minimum investment requirements vary according to the broker or brokerage firm you are using for investment purposes. Some brokers have a minimum opening balance and trade size that are fairly low, while others exceed tens of thousands of dollars.

The following is a list of some popular brokerage firms with a forex minimum investment requirement amount lower than $500 (U.S.). Each one of these firms is registered with NFA and CFTC. Please note that this is not a suggestion to choose any brokerage firm. Instead, this list is just to inform you of the choices available. Please note that most brokerage firms have a Forex minimum investment requirement of more than $2,500.

FX Club has a forex minimum trade requirement of 10 USD. This is a great place to start trading in forex for several reasons. First, they are registered with governing bodies. Second, the leverage is 100:1, so a $10 investment means you control trades of $1,000. The pips are fairly low for a brokerage firm with such low minimum trades. Their pips run as low as 3 and as high as 15 based on the currency pair. This is a tight spread which means you have greater potential for profits. The company has also been active since 2005, so you have the benefit of tenured and reliable brokers helping you trade. If you want to try the market out, FX Club is offers $100 cash investment incentive, which means that you have real money to play the forex market with and since they offer a 100:1 leverage, you are really playing the forex market with $1,000. With the incentive account you cannot withdraw the $100 incentives, but you can withdraw any profits made from the incentives in cold, hard cash. FX Club is probably the best place to start for forex beginners. It is also a great opportunity for intermediate and advanced traders.

MG Financial Group has a forex minimum investment requirement of 200 USD. This is also a low minimum initial investment. MG offers leverage spreads at 400:1. This means that a $200 investment is really controlling $80,000. Pips run as low as 3 to 5 and much higher. Furthermore, MG has been in the industry since 1992. MG allows for a free demo account, but unlike FX Club this is simply a demo account with ‘fake' money. It is used for experience and practice purposes only.

IFX Markets has a forex minimum investment requirement of 500 USD. This is also fairly low, comparatively speaking. IFX has been in the financial service industry since 1933, and incorporated forex trading platforms in 1995. This is one of the most tenured forex trading brokerage firms available. They also have pip spreads set at 2 to 3 pips with up to 100:1 leverage (not guaranteed leverage). The leverage with IFX is based on the amount you are investing, so unlike FX Club and MG Financial, the leverage amount is highly variable. Interestingly enough, IFX Markets does have a broker commission of 1.25 per lot transaction. This is likely because the leverage is variable and the pips are tighter than most other broker firms. The brokerage firm has to generate income from some source, and so this one chooses brokerage commissions. They also offer a free demo account. However, unlike FX Club this is only a demo account and you will not have the opportunity to withdraw any profit. IFX does give away monthly prizes up to $3,000 cash for the demo account.

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Forex Spreads And Pips In Currency Pairs

Forex spreads on major currency pairs fluctuate as often as the price-value of currency can fluctuate. In the forex market, currency pairs are always quoted with ISO abbreviations located at www.iso.org/iso/en/prods-services/popstds/currencycodeslist.html.

So, you will see something like: GPB/USD (British pound to U.S. dollar) or EUR /CHF (Austria euro to Swiss franc). The first abbreviation is the base currency and the latter is the quote currency. So GPB/USD would specify the amount of U.S. dollars it takes to buy one monetary unit of British pounds. It would also specify the opposite --- how many US dollars are received when you buy one British pound.

Since the currency exchange rate is based on the currency pair, the trade occurs based on a bid price of one currency to the ask price of the other currency unit. The bid price is generally lower than the ask price and signifies the value received when one unit of the base currency is sold. The ask price is given when purchasing a currency pair and signifies the amount that must be paid in the quote currency to receive one unit of the base currency.

The forex spreads are the difference between the bid and ask price. This is the amount that a broker will receive for brokering the trade---almost in the same manner as traditional stock broker commissions, but based on the bid and ask price of investors.

Forex spreads are always calculated by pips. Pips are counted as one at the fourth decimal point and then adding one from that point. A pip 0.0001 is one pip; 0.0002 is two pips; 0.0003 is three pips and so forth.

Forex spreads and pips will change based on several factors, so it is very important for you to research the broker's guidelines and ‘fine print' before selecting a broker or brokerage firm.

Be aware of a factor that influences forex spreads and pips: The amount being traded. Higher trade amounts mean lower pips; lower trade amounts mean higher pips. The currency exchange rate can impact the value of the monetary unit and therefore the value of the spread. More risky or uncommonly traded currency pairs have higher pips. The broker can change pips and spreads based on the size of their firm and the financial institution backing the broker.

The smaller the pips and tighter the forex spreads, the more opportunity you have to earn value and less payouts go to the broker/brokerage firm.

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Forex Leverage And Risk

Leverage allows you to trade with more buying power than your deposit provides. This can work for you, as well as against you. Please remember the principal rule of financial management: greater profits and higher risks are intrinsically correlated. Just the same, high leverage is associated with significant risks. When leverage is 100:1, every dollar on your deposit allows you to purchase up to 100 units of another currency. For example, with a deposit of $1,000, you may purchase 100,000 EUR/USD, or 100,000 GBP/USD or 100,000 AUD/USD.

Leverage is a ratio of Trade Size/Deposit. This means that by controlling this ratio you can control your leverage and hence risk exposure. For example, if you have $1,000 on your deposit and you purchase 100,000 units of another currency, your leverage is 100:1 (100,000/1,000=100), but if you purchase 30,000 units of another currency your leverage is 30:1 (30,000/1,000).

If you purchase 1,000 units your leverage is 1:1 (1,000/1,000=1).

If you come from a stock/bonds background, you are probably thinking that a 100:1 leverage ratio is an enormous risk. It is, but leverage is also a risk control factor. First off, remember that in forex trading, the value of a single monetary unit fluctuates less than 2 percent on a daily basis, unlike the extreme point fluctuations that occur in the stock/bonds markets. Leverage does amplify loss, but it also amplifies gains. The risk of leverage is usually minimized by stop-loss and time-price limits.

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Forex Broker

A forex broker is a person who acts as an intermediate between the buyer and seller of monetary units. The forex broker is basically your go-to guy. The forex broker helps people stay connected for their buying/selling needs and helps prevent fraud or unethical trading practices. When a broker acts as a buyer/seller, they become a principal party (dealer). A brokerage firm is a company that behaves as a broker, for example FX Club can be considered a forex brokerage firm. Forex brokers can come from large commercial financial institutions. These forex brokers are highly regulated because of the legal commitments and regulated governance of financial institutions. The small forex brokerage firms are in greater demand from dealers and traders because they have more intimate contact and lower upfront investment minimums than the large financial institutions.

Since large financial institution forex brokers often require a $500,000 to $1 million dollar trade minimum, most people go with a private or smaller forex brokerage firm. However, it is important to note that forex brokers must be able to have a wide amount of leverage, and so they are usually tied to the larger financial institutions. You want to ensure that any forex broker you choose is registered with regulators. FX Club, for example, is a Futures Commission Merchant (FCM) which is registered with the National Futures Association, and therefore is regulated by Commodity Futures Trading Commission. It is very important that you check FCM before signing with a forex broker to ensure that they are registered, and therefore are accountable to behave in a legal and ethical manner. Furthermore, it is recommended that you research the forex broker to ensure they are licensed and examine the amount of time they have been a forex broker. Longevity in the forex broker industry shows that they are stable and reliable. It is highly recommended to find a forex broker that has longevity, stability, and is a member of the FCM. In this manner, you are protecting your investment.

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Leverage In The Foreign Exchange Market

Leverage is used by investors and firms to finance assets rather than raising capital to increase value. Leverage in the foreign exchange market allows profits to be gained from the variable fluctuations in currency pairs. Few markets, even the stock market, allow for the high leverage that is available in the forex market. Traditionally speaking, leverage is based on what assets a firm or individual currently controls and the potential of future value. So, in the stock market, a person owning more stock has more leverage and capital funding possibilities than a person with few stock options. Forex leverage works quite differently. Leverage is really provided by the major financial institutions that a broker, trader, dealer, or brokerage firm is working with/beneath. So, leverage is not really based on what value the individual or firm controls. Instead,you should know that forex leverage begins when an investor sets up an account with a broker. This is often referred to as a margin account, which can be as low as a $10 minimum investment or as high as a multi-million dollar minimum investment. Based on the broker or brokerage firm's major financial institution backing, the amount of leverage can fluctuate. The amount of leverage is based on ratios, such as 50:1, 100:1 or 200:1.

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Brokerage Commissions and Forex Pip Spreads

Brokerage commissions are not direct volume-price commissions in forex. Instead, brokers often earn income by the pip spreads. The spread is a difference between bid/ask price. The brokerage commissions are not direct, but the broker earns income based on this difference. The pip is the fourth decimal place on a monetary unit. Smaller spreads mean more trader value and less broker earnings. Pips vary according to the currency pairs being traded. FX Club's current pips are:

3 pips: EUR/USD
4 pips: USD/CHF, USD/JPY, EUR/CHF, EUR/JPY,
5 pips: GBP/USD, EUR/GBP, USD/CAD, AUD/USD
6 pips: CHF/JPY
8 pips: GBP/JPY. GBP/CHF
12 pips: AUD/JPY, EUR/CAD
15 pips: GBP/CAD

The spread is usually only charged when you buy or sell, not when you buy and sell simultaneously. The pip spreads may not seem like much, but when the number of transactions and volumes of transactions are added up there can be a large difference in the trading cost.

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