Before explaining how brokers make money in the Forex market, you should know what exactly brokers are and what their function is.
The Forex market has taken boom in recent years due to the internet, which allows today hundreds of people around the world to operate in the market.
In order for an investor to enter the market and participate in it, he must seek the services of a Forex broker.
It is very important that you conduct a thorough investigation when choosing a broker to avoid being a victim of a scam. You should not hand over your money without being sure of the broker.
Who is Forex Broker?
The broker is a person or company that is dedicated to operate in the Forex market, executing purchase and sale operations for its clients, under the indications of the same.
This means that the investor operates under his own strategies and communicates to the broker at the moment when he wants to take a position in the market, so that the broker executes it.
The broker is a market agent, who is the intermediary between the investor and the market. The broker apart from executing the operations in the market is the one that charges its clients a commission for the service.
The broker is the one who has direct access to the international foreign exchange market and is also known as brokerage houses, Forex brokers has similar role to that of stockbrokers in the stock market.
How Forex Broker provide you leverage
The broker in the foreign exchange market is also the one in charge of providing you with leverage, which can be:
- 2: 1 = for $ 1 you will be lent $ 2
- 10: 1 = for $ 1 you will be lent $ 10
- 100: 1 = for $ 1 you lend $ 100
- 200: 1 = for $ 1 lend $ 200
- 400: 1 = for $ 1 they will lend you $ 400
Leverage is in simple terms, it is the money that the broker lends to the investor so that he can operate with greater capital in the market.
The broker can have different types of customers, as the market movement is made up of several groups. The client of a broker can be:
- An independent investor: He is an ordinary person who wishes to invest his money in the market.
- An international bank: Banks also make these types of investments; they form a large group that represents high movements within the market daily.
- Financial Entities: Any financial entity with capital to invest.
- A Broker: Another broker can use the services of another broker, although it is not the majority of cases, but it is possible.
- International Companies: Those corporations or private entities that invest their money in the market.
How do Forex brokers make money?
Fees and commission: Now, if you want to know how brokers make money, it is summarized as follows: a broker earns money in the first instance, from the commission they charge their clients for operations.
This means that if you are investing in the Forex market, each time you take a position in the market and close it, the broker will charge you a commission for that transaction.
This is also known as Spread. This means that the more investor operates the higher broker’s commission will be.
Investing own capital: The second way they earn money is by operating their own capital, since they are usually expert Forex traders who invest their money to make a profit from the market.
For example, if you open a purchase position in the market in which you lose $ 100, the broker will open a sales position where you earn $ 100, then this will always remain in balance and the broker will not lose the money you lent or that the investor leveraged.
Rollovers: The third way a broker earns money is through the Rollovers, which refers to the commission that an investor must pay to maintain an open position for 1 full interbank day or more.
That is to say that if the market closes at 5 pm, if you open a position after that time, it is understood that it will remain open all night, then that position is subject to the rollover.
In this case, you should also understand the following concept: A currency is associated with an interest rate, as determined by each bank, so when operating a pair, you must take into account that you are also handling 2 rates of Different interest and therefore there are positive and negative roll.
- Positive Roll: It happens when the interest rate of the currency that the investor buys is higher than the interest rate of the currency he sells. In this case, the investor is paid the profit obtained.
- Negative Roll: It happens when the interest rate of the currency that the investor buys is lower than the interest rate of the currency he sells. In this case the investor pays this lost interest.
Do not forget that in the Forex market, only those brokers can invest who are authorized by an identity that regulate and guarantee each of the participants.
For this reason, if you are thinking of investing in the most liquid market in the world, you must carry out an investigation of the broker with whom you are going to invest your capital. This is not a game of chance and you must secure your capital with a reliable broker.