What is a Forex broker?
A forex broker is a financial services company that provides traders access to a platform for buying and selling foreign currencies.
Forex is short for foreign exchange. Transactions in the forex market are always between a pair of two different currencies. A forex broker may also be known as a retail forex broker or a currency trading broker.
The foreign exchange market is by necessity a global and 24-hour market.
The clients of a forex broker include retail currency traders who use these platforms for speculation on the direction of currencies. Their clients also include large financial services firms that trade on behalf of investment banks and other customers.
Any individual forex broker firm will handle only a small portion of the volume of the overall foreign exchange market.
The Role of a Forex Broker
Most foreign exchange transactions are between pairs of the currencies of the 10 nations that make up the G10. The nations and their currencies include the U.S. dollar (USD), the Euro (EUR), the pound sterling (GBP), the Japanese yen (JPY), the Australian dollar (AUD), the New Zealand dollar (NZD), the Canadian dollar (CAD), and the Swiss franc (CHF).
Most brokers allow customers to trade in other currencies, including those of emerging markets.
Using a forex broker, a trader opens a trade by buying a currency pair and closes the trade by selling the same pair. For example, a trader who wants to exchange euros for U.S. dollars buys the EUR/USD pair. This amounts to buying euros using U.S. dollars.
To close the trade, the trader sells the pair, which is equivalent to buying U.S. dollars with euros. If the exchange rate is higher when the trader closes the trade, the trader makes a profit. If not, the trader takes a loss.
How Forex Brokers Make Money
Forex brokers are compensated two ways. The first is through the bid-ask spread of a currency pair.
For example, when the Euro-U.S. Dollar pair is priced as 1.20010 bid and 1.20022 ask, the spread between these two prices is .00012, known as 1.2 pips. When a retail client opens a position at the ask price and later closes it at the bid price, the forex broker will collect that spread amount.
Secondly, some brokers charge additional fees. Some charge a fee per transaction or a monthly fee for access to a particular software interface or fees for access to special trading products such as exotic options.