Difference between SPREAD vs COMMISSION
In order to answer this question, you need to first understand the different methods in which Brokers charge fees.
There are typically two types of fees, namely spread and commission. Spreads are calculated into your profit and loss on each trade which means that traders are often unaware of the actual amount. Commission fees are a set amount and can be seen on the traders statement, making this type of setup more transparent to the trader.
Fixed spreads — the simplest model, which seems very novice-friendly, but has its hidden disadvantages. With a fixed spread account, there are no commission fees but typically a rather high spread. During increased volatility in currency rates, a fixed spread will mean requotes if your broker uses instant execution model, and slippage if your broker operates with market execution. In both cases, your trading process will be disrupted, making you miss a trade or land a trade much different from the planned one. Slippage can be significant and you will end up paying far more in fees than you realise.
Variable spreads — this model makes the a bid/ask difference change almost every tick and has no commission fee. It also means that traders will normally experience tighter spreads during periods of calm markets. Unfortunately, it will also result in very wide spreads during high volatility or low liquidity periods. This type of trading fees are well-suited for long-term traders because they have the luxury of less restricted timing for opening their positions.
Commission - typically a zero or raw spread account. Zero-spread accounts, but also ECN accounts with near-zero spreads usually have some sort of commission, which is based on trade volume. This type of fee is preferred by traders who operate during news or periods of low liquidity. Paying commissions protects traders from abnormally wide spreads, requotes and slippage.
To elaborate further, spread and commission are both ways for brokers to make money when traders execute trades on their platforms. The spread refers to the difference between the bid price and the ask price of a financial instrument such as a currency pair, stock or commodity. This difference is typically measured in pips, and it represents the cost of trading that is built into the price of the financial instrument.
When a trader buys a financial instrument, they pay the ask price, which is always higher than the bid price. When they sell the instrument, they receive the bid price, which is always lower than the ask price. The difference between the two prices is the spread, and this is how the broker makes money. For example, if the bid price for a currency pair is 1.2000 and the ask price is 1.2005, the spread is 5 pips.
Commission, on the other hand, is a flat fee that the broker charges for each trade. This fee is separate from the spread and is usually a fixed amount per lot or per trade. Commission-based pricing is more common for professional traders who make larger trades, as the fixed fee becomes a smaller percentage of the overall transaction cost.
The choice between spread and commission pricing depends on the trading style and preferences of the individual trader. Traders who make frequent trades or trades with small lot sizes may prefer the spread model, as the costs are built into the price and there are no additional fees. However, traders who make larger trades or trade during high volatility periods may prefer the commission model, as it provides more transparency and protection from wider spreads and slippage.
In summary, the spread is the difference between the bid and ask price of a financial instrument, and it is the primary way that brokers make money on trades. Commission is a separate fee that is charged for each trade, and it provides more transparency and protection from wider spreads and slippage. Traders should choose the pricing model that best suits their trading style and preferences.