Majorities of forex traders and potential traders wonder how forex brokers make their profit. Understanding how this is done is one of the first things you need to do before investing your money in the forex market as a trader. This lets you know the way money moves in the market and also arms you with the right information you need to ensure your funds are kept safe. This article provides that important preliminary trading information to you and as well offers you some insights on how brokers contribute to the market liquidity.
Getting to know how brokers make their money would assist you to select the broker that is suitable for your investing needs. There a few ways brokers commonly employ to charge their traders. Knowledge of these is very vital to your trading success.
The main ways brokers get their income
Majorities of forex brokers commonly collect fees from traders which could be in form of commission for every trade order they place. The other groups of forex brokers make their money through the spread which is commonly the difference between the bid/ask rates of currency pairs. So the main source of income for forex brokers is through the money they get from spread or through the charge for every trader order the traders place. There are forex brokers that collect money from traders through both means but this is no more seen frequently since the business commodity requires low rates.
You will also discover that there are a few brokers who lack conscience. These would advertise to traders that they offer traders their platforms for trading without charging any form of commissions. What these types of brokers do to make their money is to increase their charges through the spread to be able to cover what they have lost from the commission.
Some forex brokers offer fixed spread while the rest offer variable spread. The amount charged in a variable spread varies depending on the number of trader orders placed. Anytime there is significant financial news from the US like the Nonfarm Payroll Numbers, the value of the spread often gets wider. As a result of this, when the market situation is volatile, traders may eventually pay more charges through spreads than they envisaged. Fixed spread is more beneficial in this regard given that the trader would already be aware before the time what charges he’d going to pay for his trades before placing orders.
Supplement means forex brokers make their money
There are Forex brokers that charge traders extra for “bells and whistles”. This is commonly when they require some customer service and training. For instance, a few forex brokers provide signals, others would provide to traders in-depth analysis, and the other group provide traders at request with extra training on individual basis privately. Apart from offering these services for traders who are willing to pay more, some traders offer the services for traders who invest huge sum of money with them. Having mentioned theses, you will not require those additional services and charge if you already understand how the market works and how to manage your money properly.
The next alternative means of income to forex brokers is through what is known as financing the “loan”. This is frequently charged to traders who trade on margin. Trading on margin is by implication taking a loan from your broker. FX brokers with huge amounts of orders occasionally gets some interest paid to them in the actual Interbank market, which you may never take part in as a trader. Irrespective of what you hear, retail traders hardly ever get close to the actual Interbank market given the fact for your fund to get there, you must be able to place a huge amount order. What the forex broker basically does is partner with a liquidity provider that breaks up these orders in bits to make it possible for traders to buy and sell at will. The actual Interbank market comprises the biggest world banks, who aren’t interested in minor trades of roughly 500 dollars for instance.