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What Do Forex Brokers Get From Your Account?

July 6, 2009 by  
Filed under Forex Market

When you engage a Forex broker you will find they do not charge a commission; this is because they derive their revenue by other means. Forex brokers make an income from converting and holding currencies, from buying and selling, from interest on funds that have been deposited with them and also on rollover fees. But it is important to understand where they benefit from your account.

Whilst you may not be paying an upfront commission, don’t be fooled into thinking that brokers are not making a profit from your account. Obviously there has to be a benefit to them so they make their money from selling a currency to you at a particular price and then buy it back at a lower one. The difference between the two prices is known as the “spread” and this can increase substantially in a very short period.

When a Pip isn’t a Fruit Seed

In Forex terms a “pip” is better known as the smallest possible monetary increment, approximately one hundredth of a percent. Currencies are priced to the fourth decimal place in Forex markets and that fourth place is what is more commonly known as the “pip” or the “basis” point.

It is through these pips that Forex brokers earn their income. Forex brokers charge a number of pips per trade and this is known as the spread. When you have been trading for a while you will notice some Forex brokers charge a consistent spread immaterial of what the trade is, but others can charge a variable spread. In a slow market a variable spread might look appealingly small, but if the Forex trading starts to fluctuate you can be certain the broker will increase his spread.

Forex brokers are regulated by the Commodity Futures Trading Commission, and you can find them through investment firms or major banks. However, since the rapid uptake of the internet finding a Forex broker has become a simple matter of searching and checking out a broker that meets you needs and that you are comfortable with. This has been a huge bonus particularly for small investors who don’t have a lot of capital and require some hand-holding to get started.

Forex Broker Office Hours

Trading in Forex markets is a bit different to other commodities, in that it virtually never sleeps, so it’s important to find out your brokers availability. By knowing this you can be confident that if you need to get out of a trade in a hurry and you PC or internet connection has crashed you know you can still close over the phone if necessary.

It’s in your own interest to thoroughly check out the backgrounds of any Forex broker that you are considering signing up with. Genuine brokers will make their companies’ financial position and history available to you on request. It is suggested you try out the demo online trading features offered by the broker before committing yourself to make sure they are suited to your needs, this costs you nothing and can prove to be a saving in terms of selecting the right broker for you.

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