The three costs: spread, commission, swap
What you learn in 3 minutesEvery trade has three costs: the spread, commission, and swap. The spread is paid the moment a position opens, commission is charged on some account types, and swap is charged for every night a position stays open. All three can be worked out before the trade is placed, so none of them should come as a surprise.
One standard lot of AUD/USD: 1.2 pips spread plus A$7 commission
| Step | Amount | Note |
|---|---|---|
| Spread in pips | 1.2 pips | The difference between the buy and sell price quoted by the broker. |
| Value of one pip on one standard lot | USD 10 | One standard lot is 100,000 units. One pip is 0.0001, so 100,000 x 0.0001 = USD 10. |
| Spread cost in USD | USD 12 | 1.2 pips x USD 10 per pip = USD 12. |
| Commission in USD | USD 7 | A round-turn commission charged on some account types. It varies between brokers. |
| Total cost in USD | USD 19 | USD 12 spread + USD 7 commission = USD 19. |
| Total cost in A$ (example rate 0.6640) | A$28.61 | USD 19 / 0.6640 = A$28.61. This uses an example rate. The live AUD/USD rate varies, so the A$ figure changes with it. |
The broker may round the spread or commission, charge swap for holding overnight, or apply a different conversion rate. Check the costs on the platform before trading.
The mistake people make here
A common mistake is to look only at the spread and forget commission and swap. A trade that seems cheap can become expensive after a few nights. Before entering, check the commission on the account type and the swap rate for the instrument. If the trade is meant to last several days, add the swap to the total cost.Check yourself
If the spread on AUD/USD is 1.5 pips and you trade one standard lot, what is the spread cost in USD?
1.5 pips x USD 10 per pip = USD 15.
Using the example rate of 0.6640, what is USD 15 in Australian dollars?
USD 15 / 0.6640 = A$22.59 (rounded to two decimal places).