Firms that provide currency traders with access to a trading platform that allows them to buy and sell foreign currencies are called forex brokers. A forex brokerage is an entity that connects retail forex traders with the forex market. A forex broker is a term used to describe the providers of foreign currencies and leverage for trading or speculating in international currency markets. Currency traders use these brokers to access the 24-hour currency market.
A forex brokerage offers you a way to get into the mix with the banking network and purchase a currency pair to hold in an easy manner. Before there were forex brokers, people wishing to trade in foreign currency needed to have a large amount of money and a special relationship with a bank to buy foreign currencies. Many forex brokers use multiple banks for pricing, and they offer you the best one available.
In the foreign exchange market, traders and speculators buy and sell various currencies based on whether they think the currency will appreciate or lose value. The foreign exchange, or forex market is high risk and sees more than $5 trillion dollars traded daily. Traders have to go through an intermediary such as a forex broker to execute trades. No matter the gains or losses sustained by individual traders, forex brokers make money on commissions and fees, some of them hidden. Understanding how forex brokers make money can help you in choosing the right broker.
Retail forex brokers typically allow traders to set up an account with a limited amount of assets and let them trade online through internet-based trading platforms. Most trading is done via the spot currency market, though some brokers deal in derivative products such as futures and options. Forex trading has been popularized among individual traders because brokers have offered them the chance to trade with margin accounts. These allow traders to effectively borrow capital to make a trade, and multiply the principal that they use to trade by large amounts, up to 50 times their initial capital.
The forex broker operates as a middleman between you and the market. In other words, in order to find a buyer or a seller of currencies, you can go to a broker and they match you up with either a respective seller or a respective buyer. However, instead of just being the middleman between you and another buyer or seller, they are also the middlemen between you and what is called a “liquidity provider”. Forex brokers exist to make it easier for you to connect with the banks out there that are buying and selling currencies. They have a set of rules that they have to follow and certain processes that are required.