What is a forex broker? How do forex brokers make money?
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What is a forex broker? A broker is an integral part of the trading process and an important business partner for every trader in the Forex market. To get started in the forex market, traders need to find a suitable and reliable broker. The following article answers questions about Forex brokers, how brokers make money from traders.
What is a forex broker?
Forex brokers are companies that provide traders with access to a foreign currency trading platform.
Most forex brokers handle only a tiny fraction of the volume of the overall forex market.
Retail currency traders use brokers’ trading platforms to gain access to the currency market 24/7 for speculative purposes. Forex brokerage services are also provided to institutional clients by larger institutions such as investment banks.
What are the types of Brokers on the Forex market?
There are two basic types of Forex Brokers: Dealing Desk (DD) and No Dealing Desk (NDD). Each type of forex broker has a different advantage and is suitable for different trading needs.
What are the characteristics of the Dealing Desk and No dealing desk?
Dealing Desk are market makers. They have liquidity available, so they have a fixed spread. Dealing desk brokers are people who deal directly with traders, not intermediaries connecting transactions. The Dealing Desk Forex Broker’s way of making money is to buy forex at a low price from the major providers, sell it at a higher price, and collect the spread.
No Dealing desks are brokers that transfer orders to highly liquid markets (STP, ECN, or both). No Dealing desks are just a bridge between a trader and a primary foreign exchange provider (STP) or other traders (ECN). Therefore, these brokers have variable spreads.
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How do Forex Brokers make money?
Brokers help traders make foreign exchange transactions, and they collect fees and commissions.
1. Spread fee
Spread is the difference between the broker’s bid – and ask for a currency pair.
For example, if the ask price of EURUSD is 1.08442 and the bid price is 1.08351, the spread will be 0.00091 or 0.91 pips.
Forex brokers analyze the market for that currency pair and offer a different spread. For Non dealing desk brokers, the spread varies according to market volatility.
To compete for customers, brokers reduce fees to attract traders and typically do not charge commissions. Instead, Forex brokers often add in the spread a fixed price to cover the commission.
2. Commissions
In the past, commissions were the primary source of income for brokers. The commission rate varies based on the trading volume. The larger the transaction, the lower the transaction fee. Commissions are calculated based on each transaction.
Traders quickly charge the spread by taking the asking price before the bid price. That is the total fee for each trade. For commissions, the trader must determine what price to buy and how much to sell to charge a fee for each transaction.
It is still more beneficial for brokers who offer 0% commission but add a fixed amount to the spread. Traders can easily calculate the spread they lose for each trade.
3. Overnight
Swap fees are fees for using leverage. Usually, brokers will not charge interest if traders borrow and pay on the same day.
Another forex broker’s revenue source comes from investing and lending funds that traders leave in unused accounts.
For example, they use funds in customer accounts to save or invest (self-trading). Moreover, of course, when the broker receives interest from that financial activity, they also have to divide a specific interest rate for the use of money by the clients.
However, a Forex broker’s most significant source of income still comes from its main activities, commissions, and transaction fees.
Conclusion
To approach the forex market is to learn what a broker is. This is the only means for traders to access the world’s largest financial market. The primary revenue of Brokers comes from commissions and fees. Traders need to learn the fees of the broker to find the right broker.
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