How do brokers make money on Forex? This question is interesting for every novice trader. After all, no one will give you the opportunity to earn a lot of money without you giving away something. The intermediary must receive something.
In general, the mechanism for generating income is simple, and brokers can do this on side activities such as training and providing additional services. Brokers’ profit does not depend to such an extent on the number of traders and the volume of their transactions, as is commonly believed. Often, the broker doesn’t care at all whether the client earns. Although honest brokers tend to care about the income of traders because their earnings depend on it. Let’s delve into details and find out how brokers earn money.
Spreads
Most brokers do not charge a commission for client transactions. But this does not mean that traders will not have to give their hard-earned money. They just need to pay a larger spread, that is, the difference between the ask and bid price of a particular currency. On the interbank market, it is much less than what is shown in the trading platform window. The difference between the market spread and the brokerage spread goes to the broker.
Earnings on Commission
If a company offers low spreads, then it will definitely withdraw a commission for the traded volume. It is important for a broker that you earn. After all, the logic is simple – the more income, the more often positions will be opened, and in large volumes. And since brokers profit from this, they benefit from your earnings.
Therefore, brokers often stimulate trading activity with various contests and bonus opportunities. According to ForexTradingBonus no deposit bonuses, as well as other offers, tend to increase the number of customers of a particular broker.
The brokers stimulate the desire of traders to develop since the prize fund is divided among those who were able to earn the most over a certain period. It also stimulates the execution of trade operations. The total income significantly exceeds the losses on the payment of prizes to traders, and everyone earns.
At the same time, the broker can form the prize fund at the expense of the charitable contributions of the traders themselves, and thus completely deprives itself of losses associated with winnings.
Earnings on Additional Services
Forex brokers often offer additional services for which they charge money. It can be a training course or a VPS. Educational services, by the way, are in great demand and can generate a decent income for the brokers. Traders want to understand all the subtleties, and if a company can develop professionals, it wins on all fronts. First, it receives the money directly for training. Secondly, successful traders make a lot of deals and pay decent spreads and commissions.
VPS is also a highly demanded service. Traders get the opportunity to launch a functional advisor that will conclude deals 24/5. The robot can trade even while the person is sleeping, and therefore, open positions from which the broker makes a profit. Therefore, it is not uncommon for brokers to offer free VPSs, although some may require payment for this service. Brokers often offer flexible prices that depend on the type of account. Where the minimum deposit is less, you have to pay there, and if it is more, a remote server can be provided for free, because the volumes in which a professional trader trades is enough.
Also, clients can order a trust management service from brokers. The scheme is simple – an investor invests money in a company, and the specialists working in it, trade, and the income is given to the investor. Obviously, the company earns a certain percentage of the profits for itself. Here, too, money is earned from several sources. Firstly, investors’ funds are accumulated, and the broker has the opportunity to increase the trading volumes that he brings to the interbank market. Secondly, the broker makes a profit from the commission that he takes on transactions.
The broker can also act as an intermediary between the investor and the owner of the PAMM account. This is also a form of trust management, only the funds are not given to a broker, but to a private trader who created an account on the basis of a broker. The latter receives a commission. As a rule, the first form of trust management (that is, money is given directly to the broker) is typical for large banks. Simpler companies make money on PAMM accounts. Although the dealer can combine these two forms of trust.
Thus, we see that brokers have plenty of ways to make money. Moreover, they are not always directly related to the conclusion of transactions. They also earn good money on additional services.
Final Words
Brokers can earn in many ways, from honest to illegal. Therefore, a beginner (and sometimes an experienced trader) needs to be vigilant. It is always a good idea to pay attention to how interested the company is in customer profits. The correct criterion is the presence of competitions for income.
The second point is regulation. You need to pay attention to the availability of licenses (the more, the better), and their quality components. First, look who the regulator is. The best option is brokers with an English or American license. There is strict control. Second, look at the license type. Often Forex “kitchens” are registered as casinos, and then legally there are no claims against them.
You also need to pay attention to whether liquidity providers are listed. Not always normal brokers say who supplies them, but if such information is provided, this is a huge plus in the company’s CV. And the main rule is to diversify. Because there is no guarantee that even an honest broker at the moment will not ditch you in the future. The financial market is like a jungle, everyone is here for himself. And in such conditions, it is very useful to be able to manage risks.