DEFINITION of commission
The commission is the charge collected by an investment broker for making trades on a trader’s behalf.
WHAT IT IS IN ESSENCE
The commission is a service charge judged by a broker or investment advisor. In return for providing investment advice and/or handling the purchase or sale of a security.
Most of the full-service brokerages derive a lot of their profits from charging commissions on client transactions.
Commissions differ widely from brokerage to brokerage.
Commission per trade
Flat fee trading means the broker charges a single rate no matter how many shares are bought or what stock is bought.
This is the most common and what most brokerages use. Stock Trade Fee (Per Share) means that a price is charged for every share traded.
On stock markets a commission is a fee, basically, that is paid to a broker in exchange. It is for the broker to help you by submitting your trading orders to the market. There are several ways for a broker to earn a commission.
Commission-free exchange-traded funds (ETFs) are a growing trend. While many mutual funds have long been without broker transaction fees, ETFs trade like stocks, and most brokers charge a small fee (often under $10) to buy or sell an ETF.
In forex, commissions are in spreads. This is a difference in bid and ask price. Each broker has different spread commissions. Commissions are also hidden in your transfer of money to or off brokers. Then brokers have commissions that could be charged directly for every trade or new transaction.
HOW TO USE
Investors who trade stocks, futures, or options typically use a broker, who acts as an agent in the transaction. The broker takes the order to an exchange and attempts to execute it as per the customer’s instructions.
For providing this service, traders pay a commission to the broker, every time when they buy and sell the tradable instrument.
The Forex market does not have commissions. Unlike exchange-based markets, FX is a principals-only market. FX firms are dealers, not brokers. This is a critical distinction that all investors must understand. Unlike brokers, dealers assume market risk by serving as a counterparty to the investor’s trade. They do not charge commission. Instead, they make their money through the bid-ask spread.