Any novice trader choosing an intermediary though which to make deals is interested how forex brokers make money. The answer is simple – whenever a trader makes deals, regardless of whether they were profitable or not, he pays some money from each transaction to the broker. A spread is the amount of pips that has to be given to the broker as a commission. The amount of commission by trading tools is available at the broker’s site.
There should be no haste when choosing among forex brokers types; at first it is important to get to know the level of commission of several different brokerages and to read reviews on brokers. You can not only choose lower commissions, but also an option of returning the spread amount. This can be done by opening an account at the official broker’s agent or partner. A partner who has drawn a client receives a fee from the broker and returns to the trader a part of the money spent on the spread. In such a chain everybody wins. To make the right choice refer to ratings (tops) of forex brokers, as they are compiled based on reviews and opinions of both experts and ordinary traders.
Leverage: a brilliant service offered by the brokers
Talking about how forex brokers make money, it is important to mention margin trading. Leverage is a classical operation of any bank (crediting at which securities are the collateral).
Example. You have disposable securities that a broker can sell at any time. He offers you a credit for $10,000, and, if the stock price rises by 30%, you receive $3,000 and as much again from the loan (minus interest).
This sounds tempting, but if the stock falls by 30%, you lose two times $3,000 and the interest. Of $10,000 there remains less than $4,000. At that the broker’s earnings increase significantly. If the leverage is 1:2 and you have $10,000, the broker will give you $20,000 more. If the market movement is 50% unfavorable, you will lose your money, and the brokerage commission will double.
Shorts: another brokerage service
Short sale is yet another brilliant brokerage service that brings them good profit.
Example. You assume that in the near future the price of certain stocks will go down. This means you will be selling. However, the broker will teach you that it is possible to earn not only on the increase, but also on the fall, and will offer these shares as a loan for a certain time.
You sell the shares, and when the price goes down, will buy them cheaper. Your winning is the difference of which the broker will certainly deduct their interest. But, if you have made a mistake and the shares go up instead of falling, to repay the debt you will have to buy them at a higher price. Your money is what guarantees the loan repayment.