You will be able to find the spread, the fee and the reference rate in any currency conversion and add them up.
Hakim moved S$5,000 from his savings into his brokerage to buy a US fund. The app said the conversion was free. He received a little over US$3,667, which looked fine until Rachel checked a currency site on her phone and said he should have had about US$3,704. Nobody had charged him a fee. He had still paid about S$50.
This lesson shows you where that S$50 went, and how to find the same number in any conversion you make.
Banks and large dealers trade currencies with each other all day. At any moment there is a price at which they will buy US dollars and a slightly higher price at which they will sell them. The mid-market rate is the point halfway between those two. It is the rate you see on news sites, currency apps and search results, and nobody outside the wholesale market can trade at it.
When you convert money, your provider buys or sells US dollars for you at its own rate, which is usually worse for you than mid-market. The gap between the rate you get and the mid-market rate is the spread, and it is a cost even when the screen says no fee. It is simply built into the price.
Some providers also charge an explicit fee per conversion, either a flat amount or a percentage, sometimes with a minimum. The total cost of a conversion is the spread plus any explicit fee. A provider with a fee and a tight spread can be cheaper than one with no fee and a wide spread.
Here are made-up figures that match Hakim's conversion. At the moment he converted, the mid-market rate was S$1.3500 per US dollar. His broker converted at S$1.3635 per US dollar.
At mid-market, S$5,000 would have bought S$5,000 divided by 1.35, about US$3,703.70. At the broker's rate it bought S$5,000 divided by 1.3635, about US$3,667.03. The difference is about US$36.67, which is about S$49.50 at the mid-market rate.
To express the spread as a percentage, divide the rate he got by the mid-market rate and subtract 1. That is 1.3635 divided by 1.35, minus 1, which is 1.0%. Hakim paid about 1% of his money just to change currency, before the fund's own costs and before any commission.
You can run the same check on any conversion. You need three things: the rate on your confirmation, the time it happened, and the mid-market rate at that time. Many currency sites show historical rates by the minute or the hour. Use a quote from as close to your conversion time as you can, because rates move during the day and a gap of a few hours can blur a small spread.
Currency conversion is a round trip for most Singapore investors. You convert Singapore dollars to US dollars to buy, and one day you convert back to spend the money here. A 1% spread on the way in and 1% on the way out costs about 2% of the money over the life of the investment, before any price change.
The same applies to dividends. If your broker converts each US dividend back to Singapore dollars automatically, each one pays the spread too. Lesson 2.2, Convert per trade, in bulk, or hold US dollars, looks at ways to cut that repetition.
Many apps advertise zero commission on US trades. That can be a real saving, but it tells you about one cost line only.
Take two made-up brokers and a S$3,000 purchase of a US fund. Broker A charges no commission and converts at a spread of 0.6%. Broker B charges a US$2 commission, about S$2.70, and converts at a spread of 0.1%. Broker A's trade costs about S$18 in spread. Broker B's costs about S$2.70 in commission plus S$3 in spread, about S$5.70 in total. The commission-free trade costs more than three times as much.
The numbers change with the trade size and the spreads, so the point is the method rather than the answer. Add every cost, and convert each one into Singapore dollars before you compare.
Your trade or conversion confirmation should show the rate applied. If it only shows the amounts in each currency, divide one by the other to get the rate. Your broker's fee schedule lists any explicit conversion fee. The mid-market rate comes from a currency data site at the same time. Some brokers state their spread or markup in the fee schedule. Many do not, and then the only way to know it is to measure it yourself, as you just did.
For the activity, dig out one conversion you made in the last few months. Find the rate you received and the mid-market rate at that time, then work out the gap the same way Hakim did. If it turns out to be close to zero, you have learned your provider prices tightly. If it is near 1%, you have found a cost worth acting on in the next lesson.
Take a recent conversion you made and compare the rate you received with the mid-market rate at the same time, then express the gap as a percentage.
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