How many of the products that you purchase each year come directly from their original creator? Likely, most of the products you buy come from middlemen rather than directly from producers.
For example, your local grocery store secures bulk oranges from growers so that you can purchase those oranges at a store close to your home. The store is the middleman securing the oranges on your behalf.
Forex brokers are middlemen as well. There is an active market where banks and governments exchange currency freely, but that market is closed to everyday investors. Brokers obtain securities from that market and make them available on the retail Forex market so that investors around the world have the opportunity to buy and sell currencies for profit.
Let's go back to the example of your local grocer purchasing oranges and selling them to you in a retail store. Your grocer doesn't do that because they want you to enjoy oranges. Their goal is to make money, and they do so by charging you more for each orange than they paid the grower. You gladly accept the higher price in exchange for the convenience of purchasing your oranges from a local store while you shop for other food items.
Brokers make their money in a similar manner. You pay the broker for the opportunity to trade Forex. This is the only way you can get into the action unless you are a banker or have other qualifications that get you into the immediate securities market.
There are two primary ways that brokers can earn money from your trades:
Commissions are fees charged per trade. It was once common for discount brokerages to charge less than $20 per trade while full-service brokers might charge hundreds of dollars in commission. Discount brokerages offer few products and don't give the in-depth advice and guidance that full-service brokers offer, so they can charge less per trade and still profit.
Today, the growing online Forex market is changing the game. Many online brokerages offer zero-commission accounts. They make their money from the spread, so don't think they are doing you a favor by dropping the per-trade charge.
If you don't know what a Forex spread is, learn that immediately. You have to know how to determine the spread for a currency pair before you can make profitable trading decisions on the Forex market.
Before the online brokerage market took off, it was common for brokers to add a variety of hidden fees to retail market accounts. These fees were often unmentioned to those applying for new accounts, so traders didn't realize the full cost of trading until they tried to cash in or take other actions on their account. Some common hidden fees included:
If your broker charged an inactivity fee and you weren't aware of it, you may take a break from trading and come back to find fees added to your account or funds withdrawn from your bank account. You may also get excited about earning a profit only to find that a withdrawal charge will cut into the expected reward.
You aren't likely to run into as many of these hidden fees when you work with an online brokerage offering zero-commission accounts. The online Forex retail market is extremely competitive, so brokers are now advertising no hidden fees and no commissions in order to lure traders. Just remember that they will make money one way or another, so you need to compare spreads to make sure you get the best deal on trading costs.
Broker and brokerage are often used interchangeably, but there is a slight difference. You may choose to hire an individual broker to trade currencies on your behalf. All decisions are made according to the arrangement you make with that one broker.
You may also choose to apply for a Forex account with a brokerage firm. In this case, multiple brokers may work together to manage your account. You can also sign up for online brokerage accounts which allow you to make trades on your own behalf using trading software, mobile platforms or web-based platforms.
Securities Broker is a prestigious job title, and it isn't something that everyone can obtain. In most countries, all brokers must pass examinations to prove they understand the regulations and laws surrounding trade in securities. Once the examinations are completed, a broker license is obtained. Most countries also require brokers to renew their licenses on a routine basis.
This prevents unqualified people from calling themselves brokers and accepting money from unsuspecting consumers. When selecting a broker, stick to well-established names and make sure they have the required licenses for your country or the country in which they operate.