The Knowledge of How Forex Brokers Make Money is Vital.
To help you understand how Forex brokers make money we have to draw a line between forex brokers and stock brokers. While the second is the ones portray in our society as the big money makers and have blockbuster movies to represent them, they trade on the stock market and profit through different instruments that operate with stocks, their prices and positions deadlines.
Forex brokers operate on the foreign currency exchange market. They sell and buy different types of currencies and estimate their value within a concrete period of time. The currency market exchanges assets for around five trillion dollars on a daily basis, which is a bit less than half of the GDP of the United States.
Traders are obligated to go through forex brokers in order to trade on the market. The difference between the traders and the brokers is that while the traders actually risk their own money. The brokers profit through different types of commissions and fees.
The process to trade on the market as it follows
The trader contacts a particular broker and gives orders on what trades he wants to be made regarding specific currencies. The broker, on the other hand, is obligated to execute those trades. The advantages forex brokers have, which are also the risks is that they are operating over-the-counter, which means that they are not going following the same principles and rules other financial markets have.
The lack of central clearing mechanism imposes a risk to the traders when the counterparty defaults, which is why a trader should make proper research before declaring a trade.
Fees and Commissions of the Forex Brokers
Brokers profit through commission per a single trade or a spread, the second one could be described as a “fee”. The spread is the difference between an asking price and a bid price. The asking price is the cost of a currency you purchase, while the bid price is the price you will receive when selling it. That contrast is also known as the broker’s spread.
Understanding all of those mechanisms could help you choose a good broker, which offers a competitive price. Do not fall for brokers that offer commission-free trades, they generally widen the spread and rarely is that in favor of the trader.
Risks on the Foreign Exchange Market
The highest risk is when trading with a margin. A margin simply means that the trader trades with money from the broker. An example would be, a person depositing 1,000$ and receiving another 1,000$ as a loan from the broker, which means he would operate with 50% margin. Unpredictable market movements, however, could make both the trader and the broker step on the wrong foot and cause huge losses.
If you contemplate on whether or not to trade in this market, we advise you to proceed with caution as the market is thinly regulated and many fraudulent schemes, which offer close to impossible results will try and take your money.
I think now you have an idea about how forex brokers make money. If you have any problem please ask from the comments section.
Read also: Fixed Spread Forex Brokers