Most of the time, you see a Forex broker offering great deals and promises a fast return of investment for traders. But what really do Forex brokers do? How do they help you when you trade forex?
Forex brokerage or Forex brokers are intermediaries of traders and the Forex market. The Forex market is where currency trades happen. To trade in the Forex market, you need a Forex trading account because it serves as a bank account that holds the currencies you buy or sell. You can purchase currencies in pairs like EUR/USD. In this case, you are hoping that the US Dollars be worth less than the value of the Euro. For you to make a profit in this currency pair, the euro must be worth more than the US dollars.
Forex Trading Then and Now
Before Forex trading is only for huge financial institutions and central banks. But thanks to the appearance of Forex brokers, Forex trading has become highly accessible to retail traders or those traders who cannot afford to take on huge deposits to join the Forex market.
But there wouldn’t be Forex brokers if they don’t get paid for their services. They get money by taking a bit from your every trade. Whenever you make a trade, the broker charges it with a few pips before these trades get into the market. For instance, the market is trading at 1.3100 EU/USD but the broker will charge you at 1.3102. If you happen to close the trade immediately, the broker can collect the amount between the price that the trader paid and the market price. This is called the spread.
You might be wondering why Forex brokers agree to this very small amount of money. The answer is that these pips are mostly neglected by traders as they are just too small to notice. This is the perfect way to make the fee more transparent. Brokerages make money by allowing the access of Forex leverage.
In Forex, you can leverage your trades and when this happens, you can take control of a larger trade without paying the full amount. For instance, you’re trading with a leverage of 10:1. With this ratio, you can take control of $1000 for depositing $10 into your trading account. This is the best way to increase your chances of gaining profit and it also mirrors losses if not handled carefully.
No matter if the trader wins or losses when they trade forex, the Forex broker will always have its share of income from the market price and the amount that the trader paid. This is how Forex brokerage companies work while providing you with ease of access in the market and more money in your account without paying the full amount. There are also Forex brokers who will teach you the basics of trading and provide a reliable trading platform like MetaTrader 5 that has numerous trading indicators and tools to go with your trading strategy.
There are now a lot of Forex brokerages out there as more people get interested in joining the market. You will find big brokerages with years of experience and services to thousands of people while there are also small brokerages that are not yet well known but offer lesser fees compared to other big brokerages. Choose any of them according to your needs as a trader.