The idea behind foreign exchange market is pretty simple. Here, traders and speculators purchase and sell several currencies depending on whether or not the currency will increase or decrease in its value. The Forex market is a high-risk platform where more than $5 trillion dollars are traded on a regular basis. Trading professionals need to go through intermediaries like forex brokers for executing their trades. However, regardless of the profits or losses sustained by the traders, these brokers make plenty of money from their commissions and overall fees. But how exactly does a forex broker make this money? Well, that is exactly what we will find out in the next few sections.
Brokerage Fees – The Primary Source Of Income
The primary source of income for forex brokers is brokerage fees. Like you already know, these brokers are responsible for carrying out trades in foreign currencies. But in return of these trades, a forex broker will charge a specific commission. This commission is charged in lieu of the trade or spread they have placed. And this is one of primary sources of income for the forex broker.
But what exactly is a spread? Well, for the uninitiated, a spread is the difference between the bid and ask price of the specific trade. The bid price is your price for selling a certain currency, while the ask price is the price received for purchasing a currency. This difference between the bid and ask price results in the spread of the broker.
A broker might also charge both commissions and spreads on their trade. While some of them claim to offer commission-less trades, in reality, these brokers make their commission by increasing their spread on the trades.
According tradingforex.id, Spreads are available in both fixed and variable variants. For variable spreads, the entire spread itself will vary according to the movement of the market. Leading market events like alteration in the interest rates might cause a major change in the spread. This in turn, can be either favourable or unfavourable for your cause.
If the market suddenly increases in terms of volatility, it might lead you to spend much more than you had initially planned for. Another thing to consider is that forex brokers might have different spread for buying and selling the same currency. So, while trading in forex, it is really important to give your entire attention to the pricing plan.
Typically, the brokers who tend to get capitalized work with several leading foreign exchange dealers tend to offer competitive prices in lieu of their trades.
Alternate Income Source
Certain forex brokers may charge an extra amount for their “bells and whistles” particularly for customer service and assistance. For instance, some of the brokers will offer you forex signals, while others will offer detailed analysis. In certain cases, you will also find brokers who offer private classes and webinars for the ones who are looking to pay more to get a bigger account. Having said that, these lessons are somewhat redundant for people who completely understand trading and are well versed with money management techniques.
In addition to providing customer assistance sessions, there are other brokers who make money on their trades via financing. There is one thing that you should keep in mind whenever you are buying or shorting a currency with the margin- that you are actually opting for a financing option.
While this can indeed get a little complex, forex brokers with bigger orders will be paid interest in their true Interbank markets, something that the masses don’t participate in. Contrary to popular notion, as a retail trader, you won’t be anywhere near the conventional Interbank market, because you need bigger orders for functioning in that arena.
Typically, your forex broker is going to work with the liquidity provider who will shop up the order in relatively small chunks. This will further allow people for trading back and forth. The real Interbank markets are made from the biggest banks across the globe, and none of them are bothered with these small trades.
In case you’re planning to trade in forex, you will be required to trade with much caution. Several foreign-exchange traders have lost their money due to fraudulent schemes in this constantly regulated market. So use your expertise, insight, and experience before you decide to trade in Forex.