How forex brokers make money

How forex brokers make money

Forex

Less than a decade ago, the forex market was restricted to huge banks, hedge funds and high net worth individuals because of the huge capital required to trade with. The amount was $1,000,000 and as such Individuals with less than this amount did not have access to it. As the world evolved into the information era, online forex trading started to gain solid footing and evolved into a huge global industry with billions of assets and funds under management and millions of people taking advantage of different services offered by brokers worldwide. Today, thanks to the work of brokerage firms, the minimum account requirements offered by some brokers have dropped to as low as $50, enabling individuals to capitalize on the movements of currencies with minimum capital. With the rising number of traders and brokers alike it begs the question, how much do brokers make?The answer is simple. Brokers make a truckload of money.

What is a forex broker?

A Forex broker is a company that provides traders the access to the forex market. The retail forex broker is very important in the forex market. In this delicate ecosystem, the retail forex broker is the only thing that gives individuals with both huge and small investment capital an equal access to the forex market.

Commissions

For fulfilling buy or sell orders, the forex broker charges a commission for the transaction or spread.Actually, this is how forex brokers earn their money.The difference between the bid price and the ask price for trade is called a spread.The bid price is the amount you will get for selling a currency, whereas the ask price is the price you will have to pay for the purchase of the currency.So this difference between Buying and Selling is the broker’s spread.A broker can also charge commission and a spread on the transaction at the same time.There are some brokers that offer “commission-free trades”, but actually, these brokers making their commission by widening the spread.

 The spread can be fixed or variable.

A variable spread is the type of spread which may fluctuate depending on the market condition and trader’s account level. An important event on the market, such as a change in interest rates, can lead to a change in the spread.This can be beneficial or unfavorable for an individual trader.If the market becomes volatile, you can pay much more than you expected. Besides, you should mind that a forex broker could have a different spread for buying and selling the same currency.

Therefore, you must pay close attention to pricing. Generally, the brokers who work with a number of large foreign currency dealers and are well capitalized, to obtain competitive quotations usually offer competitive prices.

Electronic Communications Network (ECN) brokers

ECN  is simply an automatic system that matches buying and selling orders of currencies. It connects individuals and brokerages so they can trade directly between themselves with no middleman. The ECN automatic system charges a fee for each transaction it makes. It functions mainly by displaying the best available bid and ask market quotes and it automatically matches and executes orders. Some ECNs are built for retail investors while some are designed for institutional investors.. The commission they charge is the only legal and legitimate fees that serve as the income for ECN traders.

Nowadays some ECN brokers have devised another way to make profit and this is the use of markups. They basically add markups to the trader’s orders. For instance, if a broker adds 3pips to the entry prices, then the client enters the forex market with a three pip higher price. The three pip will be the profit for the broker. The markup is basically hidden from the trader.

In conclusion, traders need to be extra vigilant and careful about the brokers they use. Because they are many brokers who are operating with questionable reputations. Make sure you have crossed checked every information on the brokerage firm you want to invest with. Make sure they are properly licensed to operate since your account will be an escrow account in that way no one can escape with your hard-earned investments. And lastly, watch out for some qualities of the best forex brokers like their withdrawal options and customer support.