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Trading commission fee is costing you more money than you think
2 minute read
Australia is pretty lucky when it comes to the quality of our stock brokers, although given the large amount of money that can be made in this industry, there is always a small minority that will take advantage of the unwary.
This week, the Federal Court ordered Forex Capital Trading to pay a $20 million dollar penalty and the sole director to pay $400,000 for misconduct and breaches of his duties in what has been described as a Wolf of Wall Street type culture amounting to systemic unconscionable conduct.
Trading in foreign exchange and other leveraged markets, such as CFDs, by retail clients has increased substantially since the COVID-19 pandemic hit our shores last year largely due to the commission free propaganda surrounding these products. What most retail clients fail to understand, however, is that when they trade with a broker who is a market maker (where they make the market), they decide on the spread between the bid and ask price.
Typically, this spread is much larger than a broker who mirrors the underlying asset. What this means is that the profits you could make amount to a lot less and your losses are much larger when trading with a market maker. So while it may be commission free, you are paying one way or another.
Another fact that retail clients fail to understand about these products is that the money deposited into client trading accounts often becomes part of the broker’s revenue due to the client’s lack of knowledge and experience when trading these markets. Imagine a business model where you could predict in advance how much profit you could make based on the amount of money deposited into client accounts.
This is why I advocate that traders should get educated about how to trade in leveraged markets, so they are abundantly clear about the risks of trading these products. While I applaud ASIC and the courts for their continued efforts in shutting down the bad apples in our industry, the responsibility firmly lies with each and every trader to do their research and be suitably experienced, and skilled before attempting to trade these high risk markets.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au
NB: Neither Dale or Wealth Within are affiliated with any of our related portfolios.