How Do Forex Brokers Make Money ?

In forex trade, traders buy and sell different currencies to make money. The forex market is volatile and you can lose all your money without a proper understanding of the market condition. Here brokers can help you to take the right decision. Forex brokers make money through different processes including commissions and fees. In this article, we will know the role of a forex broker and how he makes money from the forex trade.

Role of a Forex Broker

A forex broker facilitates currency trading by helping traders to buy or sell currencies. The brokers normally work on the OTC. The OTC market is flexible and does not follow the same regulation of other financial trades. You will find many experienced and reliable brokers in the forex industry. At the same time, you will find some fraud. Therefore, it is important for investors to choose the one who has a good reputation in the industry.

Ways to Make Money

Leverage

Spreads on a small position might not enable brokers to earn more. Therefore, most brokers provide high leverage. However, it helps the traders to multiply their trading volume. If the condition goes in their favor, they will make huge profits. In unfavorable conditions, they will lose their money. In brief, it increases the possibilities of profits as well as losses. But trading the bigger lots that become available with1:100 leverages will enable brokers to earn a hundred times more on the spreads.

Currency Pair Spreads

The key source of income of forex traders is the spread, the difference between the Bid and Ask rates. Brokers will have the access to the lower spreads and then mark-up to the spreads and then pass the quotes to the traders. By doing so, the brokers can make money that the investors lose on the added spread.

Transaction Fee

Brokers also make money from the payment processing commission. Most online brokers do not charge commission. They use it as the marketing strategy to attract more traders. However, some brokers ask for payment processing fees. These fees will be deducted when the traders will withdraw or deposit the money. These fees are small and fixed in the currency unit. Brokers do not earn much from the fees. But these are enough to meet at least some of their expenses.

Overnight Swap Spreads

Brokers find many ways to make money and overnight swap is one them. They can pay overnight swaps to the investor when the difference between the interest rates in the currency fair is positive. The brokers will get paid from the investor’s account when the difference is negative. In this process, the forex brokers always make money. For example, when a trader is selling a lot of EUR/USD and another one is purchasing the same amount, the second trader will make money on the overnight swaps. In that condition, the first trader will lose a big amount of money that is enough to compensate the second trader’s earning and even to feed the broker.

Proprietary Trading

Brokers can also make money by trading against the trader. This is an unethical way to make money by trading against your clients. However, this is the most profitable way. A broker can trade against his own clients. Therefore, it is always suggested to avoid the brokers who do not hesitate to trade against his own clients. When the leverage is low, no processing fees and overnight swaps are relatively fair, the brokers might think to trade against you to make money. This is the only way that can ensure more profits.

Licensing and Agreements

Brokers can make money from the infrastructure licensing and white label agreements. Some experienced brokers have set their own international IT systems including CRM, payment processing, back office, reporting, and similar kind of works to facilitate the functioning of the brokerage in a better manner. They get the license for these systems to make money by offering them to the third parties. This system enables the new brokers to enter the forex industry and also helps the experienced ones to make money from this process. In fact, some brokers have set their own trading platforms under white label deals to earn more.

To sum up, forex brokers have many proven sources to make money. With experience, they will be able to earn more.