One of the commissions that has the greatest impact on the profitability of investors in the stock market or traders and in turn one of the most unknown is the commission for currency exchange.
What is the currency exchange commission?
The commission for currency exchange is one of the most expensive that an investor suffers when buying shares in a different currency than the currency of the account with which he operates.
Although many investors are unaware of its existence, it is almost the only commission that all brokers charge, even those that use the slogan of being a “commission-free broker.”
Its main characteristic is that it is applied both in the purchase and sale of shares and in the collection of dividends and that it does not appear in the commissions that your broker shows you before accepting the operation, so it goes unnoticed by many people.
How does the commission for currency exchange work?
Imagine that you have €10,000 available that you want to invest in a company with a price per share of $100 and we assume that the euro-dollar exchange rate is €1=$1.
Our common sense would tell us that we can buy 100 shares of said company but suddenly you find that you only have $9900 to buy. What happened?
The broker has simply applied a 1% commission for making the currency exchange. Since your account is in euros and the share is in dollars, the broker is in charge of changing your money through a third party so that you can buy that amount of shares denominated in dollars and for this process you have been charged a commission.
How to avoid paying the commission for currency exchange?
The reality is that all brokers charge it but you can avoid its impact through the following actions:
- Use brokers with multi-currency accounts or at least the one with dollars.
- Use ADR to buy international companies in euros. But BE CAREFUL, some ADRs have additional commissions or no liquidity.
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