Currency conversion charges, Interbank rate Margin and Multi-currency accounts

Currency conversion charges, Interbank rate Margin and Multi-currency accounts

Some stock brokers offer a pretty low dealing commission but then they’ve got pretty high interbank rate margins which means that if you need to trade in a foreign currency the price of your trade will be much higher than what you’re being quoted, replace interbank rate margin by ‘hidden charge’ if that’s easier to remember.

A few examples of how a different margin could affect your transaction follow:

Interbank Exchange Rate (GBP/US: £1/$1.57)
Margin 0%

0.01%

(Interactive Investors)

0.5%

(Saxo Bank, SippDeal)

1%

(iDealing)

1.5%

(iWeb)

2% 2.5% 3%
Transfer Amount (£5,000) $7,850

$7,849

(-$1)

$7,811

(-$39)

$7,771

(-$80)

$7,732

(-$118)

$7,693

(-$157)

$7,654

(-$196)

$7,614

(-$235)

Transfer Amount (£1,000) $1,570

$1,569.8

(-$0.20)

$1,562.2

(-$7.8)

$1,554.2

(-$16)

$1,546.4

(-$23.6)

$1,538.6

(-$31.4)

$1,530.8

(-$39.2)

$1,522.8

(-$47)

The margin is applied to the Interbank Exchange Rate so that the final exchange you receive is not as good, example:

Interbank Exchange Rate = £1/$1.57

Margin = 1.5%

Final Exchange Rate = 1.57-1.57*1.5% = 1.54645

Multi-currency accounts

Some brokers just offer a single investing/trading account, hence that this conversion will be applied twice (when buying and selling your investment) so these costs will quickly add up if you deal frequently. Even if you don’t, it might be worth it to find a broker that offers a multi-currency account so that you can handle your investments in different currencies simultaneously and don’t suffer for continuos currency costs.

Please note that ISA rules do not allow you to hold any currency, hence you’ll have to always invest in Pounds, which will incur two FX currency conversion fees. Remember to check the FX commission of your ISA account

FX currency exchange companies

If you’re dealing with international investing often, it might be worth to transfer the money to your broker account via a FX currency exchange company that could give you a better rate than that offered by either your bank (when sending the funds in a different currency) or by your brokerage account (when receiving the funds in a different currency). One important note to remember is that these FX currencies companies are not protected by the FSCS so you need to be careful with the company you choose, don’t check just the cheapest quote if you’ve never heard about that company, and as a minimum you should check they’re registered with the FSA: financial services Register

Examples of FX currency exchange companies (from UK):

Some of these companies might offer other services such as: Forward Contracts, Stop Loss Orders, etc

Comparison sites for FX currency exchange:

Main Features of your broker for International Trading:

  • Low interbank rate Margin
  • Multi-currency account

 

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