I have read in a couple of threads now people advocating the trading of stocks over futures or forex for the beginner trader. The reasons given are that stocks are less efficient, therefore offering more opportunities to the trader, also it is sometimes mentioned that stocks are cheaper to trade. It is the second one that I am having difficulty understanding, if I use MB as in example, I can place a $1000 forex trade and incur a commission of 5 cents, if however I place a stock trade it seems I'm looking at a minimum commission of $1 (from the IB site). I'm not sure how this is cheaper, am I missing something?
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Comparing Commission Between Different Markets.
- Thread starter Craig66
- Start date
You need to factor in the bid/ask spread. Its a hidden cost that can add up quickly. For liquid stocks, the spread is generally $1.00. For S&P emini futures, the spread costs $12.50.
Cool, good point. However if we use the FX example again of a $1000 trade on say EUR/USD, the spread cost combined with the transaction cost is still nowhere near $1.
Let's say the EUR/USD is @ 1.4 with a 2 point spread.
Commission = 1000 * 1.4 * 0.00005 = $0.07.
Point value = 1000 * 0.00001 = 0.01 $ per point.
Therefore total cost = ~9 cents.
Let's say the EUR/USD is @ 1.4 with a 2 point spread.
Commission = 1000 * 1.4 * 0.00005 = $0.07.
Point value = 1000 * 0.00001 = 0.01 $ per point.
Therefore total cost = ~9 cents.
I don't trade forex, but my understanding is that for the major currency pair like the EUR/USD, GBP/USD or USD/JPY one pip is always $1.00 per 10,000 currency units. So a two point spread is $2.00
My understanding for say the EUR/USD is that point value is trade size * point size.
If one lot is 10,000 and the point size is 0.0001 then you are correct the spread size is $1 per point in that case. However with smaller trade sizes and 5 point values this is not necessarily the case (as with MB I can place a $1000 trade and there are 5 points in the price).
Once again I may be utterly missing the point.
Edit: I now realize the error, the spread will be 20 'points' if the point size is 0.00001, therefore the calculation of spread cost is $1000 * 0.00001 = 0.01 $ per point => 20c spread cost.
If one lot is 10,000 and the point size is 0.0001 then you are correct the spread size is $1 per point in that case. However with smaller trade sizes and 5 point values this is not necessarily the case (as with MB I can place a $1000 trade and there are 5 points in the price).
Once again I may be utterly missing the point.
Edit: I now realize the error, the spread will be 20 'points' if the point size is 0.00001, therefore the calculation of spread cost is $1000 * 0.00001 = 0.01 $ per point => 20c spread cost.