Forex traders are in the currency exchange business to make money, same as the forex brokers. While a lot of people may have a good idea of how forex traders make their money, many may not know what forex brokers have to do to make some profits. In this article, we will discuss the forex brokers and how they make profits from the forex market.
WHO IS A FOREX BROKER?
A forex broker is a person who arranges currency exchange transaction between a buyer and a seller for a commission. All the trades that take place in the forex market, which amounts to as much as $5 trillion in volume, go through brokers (as intermediaries) before they are actually executed. While traders are out to make profitable trades, brokers are out to make any trade at all. It does not matter if the transaction went all fine, as long as there is any at all, the broker makes some money from it.
HOW DOES A FOREX BROKER FUNCTION?
To understand how forex brokers make their money, it is good to know how exactly they function in the forex market. Here are some key point functions of forex brokers
Provide traders with access to trade the forex market in an OTC (over the counter) method
Takes order from their client to either buy or sell a currency pair. Traders have access to the forex market quite alright but every move they make there goes through the broker before it can be actualized.
Introduces a certain level of liquidity to the market. Liquidity is how fast an asset can be bought or sold off. A currency pair can be liquid on its own, but forex brokers market it the more so by match making buyers with seller, and vice versa.
THE FOREX BROKER FEE/PROFIT
For the work they do for their clients, forex brokers charge a fee as commission per trade; that is right, per trade. That is to say that every trade one performs is paid for. The good thing about it is traders do not really see this fee as substantial because it is too tiny in most cases. It is called spread, and is defined as the different between the bid and ask price. In carrying out the transaction, the broker gets to make some changes so as to actualize the spread, but not with the traders’ consents.
Another way forex brokers make their money is through commissions. This is usually the case with forex brokers that offer narrow spreads. When the spread is too narrow, they may lose out of business. So to make sure they do not, the demand for a commission from their clients. Some brokers with wide spreads do not ask for commission seeing that the spread is wide enough.
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