Forex is an abbreviation for the foreign exchange. Trading forex is entirely different from trading stocks. Based on the stock tips and knowledge forex trading cannot be excelled. Most people believe that only the banks, business-houses, and federal governments benefit from forex trading. Forex market is vast and the speculators and the traders trade trillions of dollars daily.
Just like trading stocks, brokers exist in the forex trading market. In order to sell or purchase the currencies, brokers accept orders and process them. Forex trading helps buyers and sellers in many ways. One question always confuses the new traders and the investors that how brokers make money. They want to know about the brokerage in forex trading.
Though brokers exist in both the stock trading as well as the forex trading market, the role of the brokers is entirely different. Forex trading is an over the counter market whereas the stock market is centralized. Brokers in the forex trading are not bound to any governing body or any centralized mechanism. Forex brokers are free from a number of rules and regulation. It becomes necessary to choose the forex broker very carefully.
Brokerage Or Broker Fees
Just like any other trading options like trading stocks, brokers in trading forex charge brokerage or broker fees in order to make money. A broker fee is indeed the prime source of their income. One of the ways opted by most of the brokers is to charge a commission on every trade. No matter you are selling or buying, you will need a broker and the brokers will charge commission. Some brokers claim commission free trading but there are certain ways in which they charge a fee.
Two important terms form the basis of the concept of the forex trading; ask price and the bid price. Ask price is the price quoted by the market and the bid price is the price quoted by the investor. Another way of charging fees by the brokers counts its basis on the concept of these two prices. Brokers generally keep a spread between the asking price and the bid price as their fees. Some of the brokers even charged both the fees but with advancement in time, such brokers are losing their place.
Some brokers fix their fees in the beginning irrespective of the profits earned by investors, while some tend to keep their fees variable. Based on the earnings by the buyer or seller, the brokers tend to charge a percentage of it as fees or brokerage. Such a case is of variable fees and profits may fluctuate the brokerage fees. While the fixed broker fees may prove to be safer for the investors as the brokers may not exaggerate the stretch in the asking price and bid price.
Apart from the direct way of charging the brokerage or broker fees, brokers still make money from indirect or alternate ways in trading forex. Once such of making money is through signals and notifications by the brokers. Brokers are well versed in the forex trading and they use their knowledge in order to charge money from the consumers. They notify and inform the investors about the risks and the earning opportunities and in return, they charge fees.
Some brokers even make money through webinars, seminars, and other coaching options for the new traders. The fee of these courses is quite high and earns brokers good money. Some brokers even set up 24 hours of support systems and earn money through this. They usually provide traders with mobile applications and online web forums. These web applications provide notification options as well as stored information for troubleshooting and investment doubts.
Another way of making money for the brokers is through financing loans to the traders. In order to understand this concept, we need to go back to the basics of forex trading. The concept of the margin and the leverage amount provide the traders with options to trade more than their current balance. Trading on margin is equivalent to borrowing money from the brokers. The interest on the amount above the current balance is the income of the brokers.
Brokers earn money in a number of ways. In forex trading, the role of the brokers is different from the trading stocks due to the absence of any centralized governing body. The prime source of the income of the brokers is the same everywhere. Brokers charge fees in order to make money. The fees can be flexible or fixed varying from borrower to borrower.
The spread between the bid price and the asking price accounts the main profit of the borrowers. During recent years, the borrowers discovered many ways in order to make money. All the ways revolve around at facilitating the trading process for the new and old traders. They make money by imparting education through private classes, seminars, or online applications. Choose the brokers carefully considering all these income sources.