Forex brokers are one that provides traders access to a platform that enables traders to buy and sell foreign currencies. A set of two different currencies are always involved between transactions made in the market, so forex traders deals in a particular pair either buy or sell, they want to trade.
We can also call Forex brokers as a currency trade brokers or retail money broker. Most of the brokers only handle a pretty little part of the size of the overall foreign exchange market. For speculation, these brokers are utilized by Retail currency traders to get access to the 24-hours currency market. Large firms also provide Forex brokerage services for institutional clients, such as investment banks.
Crux of the Article
Forex brokers allow traders access to the foreign exchange market for currencies. Most brokers service retail clients, though larger banking firms service institutional clients as well. The brokers enable clients to buy and sell with very substantial leverage. The brokers make money primarily on the bid-ask spread but may have other ways to do so as well.
The Role of a Forex Broker
The brokers provide access to trading on all major currency pairs; EUR/USD, GBP/USD, USD/JPY, and USD/CHF as well as the remaining g10 currencies and all the exchange rates between them. Moreover, most brokers will let customers trade in growing market currencies.
Further, you’ll get to know the most common currency pairs traded in the forex market. A broker makes it possible for a trader to open a trade by buying a currency pair, and close the trade by selling that same pair. For example, if traders want to exchange Euros for U.S. dollars, they buy the EUR/USD pair. This amounts to buying Euros using U.S. Dollars for the purchase. When the trader closes the trade the pair would be sold by him, which means buying U.S. Dollars and using Euros for buying. If the exchange rates were higher when the traders closed the trade, the traders would keep the profit, otherwise, the traders would realize a loss.
Client services have been improved by the brokers over the years. Opening a forex trading account is usually quite simple and can be done online. Before trading, a forex broker will require customers to deposit money into their accounts as security. However, the broker also provides leverage to customers so they can trade larger amounts than what is deposited in their account. Depending on the country the traders are trading from, that leverage can be 30 to 400 times the amount available in the trading account. High leverage makes forex trading very risky and most traders lose money attempting to trade in this way.
How do Forex Brokers Make Money?
The brokers are compensated two ways; firstly through the bid-ask spread of a currency pair. For example, when the Euro-U.S. Dollar pair is priced as 1.20010 bid and 1.20022 ask, the spread between these two prices is .00012, or 1.2 pips. When a retail client opens a position at the asking price, and then later closes the position at the bid price, the broker will have collected that spread amount. Secondly, brokers may charge additional fees. Some may charge a fee per transaction or a monthly fee for access to a particular software interface, or fees for access to special trading products such as exotic options. However, competition among brokers is very intense and the majority of firms servicing retail clients find they must attract customers by eliminating as many fees as possible. This has led many to offer free or very small transaction costs beyond the spread.
Some forex brokers also make money through their own trading operations. This can be problematic if their trading creates a conflict of interest with their customers, but regulation in this area has helped to significantly reduce this practice.
Regulations and Rules among Brokers
Two entities serve regulation functions among forex brokers in an attempt to discourage and eliminate fraudulent practices: the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). These organizations publicize lawsuits they may pursue against any whose practices are deemed fraudulent or intentionally harmful to their customers.
It is valuable to do some research to find out whether a broker has an excellent reputation and has the functionality that you are looking for in a broker.
A practice or demo account is provided by most major forex brokers so that the prospective clients can get good understanding of how the system works and what it is like. Before selecting and deciding with which broker you are going to start trading with, test out as many platforms as possible.
Also, because the forex market is a 24-hour market, most quality brokers will provide 24-hour customer service. Here are five key characteristics, check before selecting a Forex Broker for you:
- Regulatory Compliance
- Account Details
– Leverage and Margin
– Commissions and Spreads
– Initial Deposit
- Currency Pairs Offered
- Customer Service
- Trading Platform
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