"Money isn't the most important thing in life, but it's reasonably close to oxygen on the 'gotta have it' scale" - Zig Ziglar
The focus of a trader is to earn money in the forex market. We tend to forget that every participant in the currency market is there to make a profit. Gaining an understanding of how the other participants, especially forex brokers, earn money gives a clearer perspective of the functioning of the forex market.
In What All Ways Forex Brokers Get Compensated?
Forex brokers do not charge a commission on the trades. So, how do they make money? Here are some of the ways in which forex brokers earn money:
The majority of the earnings of a forex broker comes from the buying and selling of currencies. Money is made from the spread, which is the difference between the ask price and the bid price. The ask price is the price at which the market maker sells you the currency, whereas the bid price is the price at which the currency is bought from you.
Most brokers earn money by offering high leverage to traders since very often spreads are too small to make significant profits for them. Through leverage, they can multiply their profits (although the risk of loss is also higher). With leverage of 1:100, forex brokers can make 100 times more money on spreads than in the absence of leverage.
Overnight Swap Spreads
If the difference between the interest rates of the currency is positive in the trader's position, the FX broker pays the overnight swap to the trader. Conversely, it goes down (negative) then they earn some from the trading account. However, these payments are asymmetrical and get converted to the advantage of the broker.
Commission on Payment Processing
Online brokers do not charge commission on every trader. They usually advertise this as a feature on their website. However, traders are sometimes charged payment processing fees when they make a deposit or withdrawal. These fees are usuallyverysmall amount and not in % view. There is no doubt that these commissions are too small to make a significant contribution to a broker's profit but go towards reducing the expenses.
Trading Against Traders
It is not uncommon for some brokers to use unethical ways to make money in the forex market. They do this by trading against customers. In fact, they make huge profits by doing this. Traders should steer clear of brokers that make money when you lose. Here are some ways to know whether a broker is trading against you to earn money:
- when spreads are too small
- the leverage is irrelevant
- the overnight swaps are good
- payment processing is free
Traders must have an understanding of how their brokers are earning money. This way, they can protect themselves from unnecessary expenses and scams.