Forex brokers are firms that provide access to a platform to traders that helps them to buy and sell foreign currencies. Within this market, transactions are always between a pair of two different currencies, so traders either buy or sell the particular pair they choose to exchange.

Forex brokers may often be called a currency trading brokers or retail forex broker.

These brokers provide retail currency traders access to the 24-hour currency market and help traders to speculate. Larger firms, such as Commercial and Investment banks, Investment Managers, and Hedge Funds, Multinational corporations, also use these Forex broker services. They accommodate the trading of all other major currencies; GBP/USD, EUR/USD, USD/CHF, and USD/JPY and the remaining G10 currencies.

A forex broker assists the trader to open a trade by purchasing a pair of currencies, and by selling the same pair, closes the trade. For instance, if traders want to exchange or swap Euros for U.S. dollars, they first buy the pair EUR/USD. Then they would sell the pair by closing the trade. In this exchange transaction, the amount of the purchased U.S. Dollars will be equivalent to the Euros used for the purchase. If the exchange rates were higher when the trader closed the trade, the traders would keep the profit; otherwise, the trader would bear the loss.

Key terms associated with Forex Broker:

The two main terms associated with Forex Broker are bid and ask, referring to an exchange of two-way price, which means the best possible price at which a security can be sold and purchased at a given time. The bid price is the maximum amount a buyer is ready to pay for a share of stock while the ask price is the minimum amount a seller is ready to accept for that same share of stock. A trade takes place when both the buyer and seller agree on a share of a stock price, which is not lower than the ask and not higher than the bid.

Spread is the difference in the amount between the bid and ask, which is the primary measure for the asset’s liquidity. To a large extent, for better liquidity, the spread value should be minimum.

For example, when the EUR/USD pair priced denoted as 1.30010/1.30040, the spread between these two prices is .00030, or 3 pips. The Forex Broker will collect the spread amount when a client opens a position at the ask price, and then closes the position at the bid price.

How Forex Brokers Make Money:

There are three ways a Forex Brokers can make money. i.e., a fixed spread price, a variable spread price, and a commission price, which is based on a percentage of the spread. For instance, if a fixed spread price of three pips (continuing with the above example) is offered by market maker instead of a variable spread price, the difference of 3 pips will be free from the volatility of the market and hence will always be the same.

If a broker is offering a variable spread, the spread value will vary to be as low as 1.5 pips or as high as five pips. The spread value bank on the currency pair being traded and the level of market volatility.

Sometimes a very negligible commission may be one-tenth, or two-tenth of a pip is charged by the brokers, and then pass the order you have received to a large market maker who is his associated companion.

Other charges

Brokers may often charge additional charges.

• Fee per transaction,
• A monthly fee for accessing a software interface,
• Fee for maintaining the account,
• Inactivity fees,
• Low balance fee,
• Fees for accessing special trading items.

Account Maintainance Fee is a fee charged by brokers to an investor if certain requirements aren’t met.

Inactivity Fee is an amount charged by the brokers from investors who aren’t involved in buying or selling activities from their broking account in a time frame specified by the brokers.

Low Balance Fee is the fee charged by the brokers from investors who have an amount less than the minimum limit specified by the broking firm.

Deposit and Withdrawal fees are the fees charged by the broking firms from the investors while making the deposit or withdrawal from the broker.

However, there is immense competition among forex brokers. Most of the firms which are providing service to retail clients observe that they have to attract customers by eradicating as many such additional charges as possible. This has led many firms to offer free or small transaction costs.

To make money, several Forex Brokers make their own trading as well for a large profit. When Forex Brokers trade on their own, this may cause a problem with their clients and causes a conflict of interest. Therefore to avoid or eliminate fraud, two organizations serve regulation functions i.e., National Futures Association (NFA) and Commodities Futures Trading Commission (CFTC).

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