How Forex brokers make money

A lot of people started trading on forex from all across the world. If knowledgeable enough and a pinch of luck, a person can make quite a bit of money. Brokerage firms are a big part of the industry. They help people use popular platforms and perform operations on a daily bases. Generally, it is always recommended to trade with a broker, however, make sure the institution is trustworthy and operates within the regulations as scamming is quite common in the industry. This can be done through viewing reviews, checking licenses, seeing where the company is registered and under which regulatory body’s jurisdiction do they operate.

Why Do We Need Brokers?

Technically speaking, one can always opt-out of working with a broker and start trading on their own using any currency at the bank, however, the rate at which the exchanges happen will be horrible and the usage of leverage is out of the question. So in conclusion you could trade without a broker but the gains will be measly and the process – much more painful.

A forex (FX) broker is basically a medium between an individual retail forex trader and the forex market. The trading is done between banks at various prices, which changes from a bank to a bank. When someone starts trading they open a forex trading account which gives the ability to start purchasing and selling currency pairs. If you buy a EUR/USD currency pair, this means that you are waiting for the USD to lose the value per Euro over time. If the Euro becomes more valuable in comparison to USD you make a profit.

A forex broker offers a way to get into the banking network to purchase a currency pair. Before FX brokers, people needed to have large amounts of money to invest and special relationship with the banks to be able to trade in foreign currencies. This is a thing of the past though.

There are good and bad brokers so one has to make sure to select a correct one to trade with. This can be done by looking at the myriad of different bonuses and services, which brokers are offering. Some leading brokers like Axiory, for example, are usually offering fair bonuses with timely withdrawals and deposits and are regulated by trustworthy regulatory bodies like the International Financial Services Commission (IFSC). The conditions are always proportional to what the trader can handle judging by their skill levels and when the bonuses are available, they come in a fair manner as a lot of other broker services set up such requirements that most of the traders are losing their investment as well as the added bonus, while Axiory, works on the betterment of the system where the amount of trading required is proportional to the skill level and the investment amount making it easier for the traders to utilize the bonus as well as set conditions to their benefit. The latter is an extremely important aspect to pay attention to while selecting a broker.

How Do Brokers Make Profit?

To keep it as simple as possible, the broker makes money by keeping a cut from the performed trade. The difference in the relationship between currency pairs is calculated in pips. A pip measures the amount of change in the exchange rate for the currency pair. When one makes a trade, the forex broker charges for a few extra pips before actually placing the bet. This means that when the market is trading at 1.3000 EUR/USD as a buying price, the broker will put you in at 1.3002. If the trade is closed, the broker collects the profit between the market price and the amount you paid. In broker terms, this is called spread and is exactly how the spread works in Forex as a whole. So to put it in a more simple manner the spread is defined as a price difference between what the trader puts to purchase or sell an asset and the broker added fee or pip.

An obvious question is why would a broker pick such a small item to make money on? Well, this is connected to how the forex market works in general and the forex leverage. The forex leverage means borrowing a certain amount of money to invest in something. In the case of FX, the money is borrowed from the broker. Forex in general offers high leverage. This means that the trader can build-up and control a much higher amount of money than they initially invested. Since brokers give access to leverage, say for example 10:1, this means that if the trader is on the market at only $100, they can control as much as $1000. This may result in high-risk high reward case scenarios, but, the end result means that each pip is valued a bit higher than what it seems like and the broker earns much more money in the end. Keep in mind that the leverage we used is just an example. It may be anything from 10:1 to 400:1 depending on the broker. Overall, the most leverage doesn’t mean the best broker. Sometimes CFTC forex trading rules call for a specific amount of leverage like in 2010.

The broker is absolutely safe from your losses. In the end, even if you as a trader do not end up making a profit the broker will still be making their winning on the difference between what you pay and the actual market price. This may sound scammy but in the end, we have to remember that brokers are providing a service, which is easy access to the financial market and the ability to trade currency pairs with leverage. A lot of these brokers will even help the newer traders acquire some basic skills to start trading. This is a business model where a successful trader will always stick around meaning that they will generate more and more money for the broker in the long-term.