How forex broker works

People are more interested in being forex traders that being brokers. Sometimes, they even wonder if it is really necessary to go through a broker before accessing the foreign exchange environment. Forex brokers are indisputable and it is not possible to trade without them. A good understanding of how forex brokers work will give anyone a good grasp on the importance of brokers in the forex market.

WHO IS A FOREX BROKER?

A forex broker is an individual or a firm that have the right to grant retail forex investors with access to trade the forex market. Note that without the broker, it is practically impossible for one to access the forex market.

Generally, currency trading is without oversight, and does not have a central location. As such, traders enjoy a bit of a free hand, which can be disastrous if care is not taken. However, the forex brokers bring in a bit of control over the forex market. They do not have as much freedom as the traders. They have to take some exams in order to be certified and qualified to function as a broker. The register with regulatory bodies that are responsible for imposing regulations that guide how a broker can operate with a forex trader.

HOW DOES A FOREX BROKER OPERATE?

Like as mentioned earlier, the basic functions of a broker are to grant a client access to the market and to execute their buy and sell orders. How they function depends a great deal on how they make their money. Here are some of the ways forex brokers make their money

- SPREADS:

Spread is the commission a broker takes for being the mediator in a transaction. It is the different between the “bid” and “ask” price of a security. When traders want to sell a security, the fix a price that they are willing to sell the security, known as the ask price. This is the price displayed for buyers to see. When someone eventually buys the security, the broker takes a tiny part of it and returns the rest to the seller at a price lower than the ask price; the bid price. That little difference goes to the broker as a commission.

- LEVERAGE:

Brokers offer traders a leverage to trade the forex market. It allows the trader to control a whole lot more than what they are worth. For instance, a 10:1 leverage will mean that a person with $10 can control an account of $1000. The spread still applies in this case; the only difference being that is it is ten times more. This means the broker get to make ten times more in this case.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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