Forex brokers make money by providing services to their customers. These services may range from currency trading to margin lending. Forex brokers provide these services to clients who want to speculate on the price movement of currencies. There are many different types of forex brokers, each offering a unique service.
The following are some of the ways that forex brokers make money:
Margin Lending
Margin lending is where a broker lends money to a client at a higher interest rate than they would receive if they were to lend the same amount themselves. Clients borrow funds from the broker and then use those funds to trade currencies. When the client makes a profit, the broker takes back the borrowed funds plus a small commission. If the client loses, the broker keeps the entire loan.
Spread Betting
Spread betting is similar to margin lending, except that instead of borrowing money, the broker offers to pay a certain percentage of the spread (the difference between the bid and ask prices) to the client. The client receives a payout based on whether the market moves in his favor or not. If he wins, the broker pays him a portion of the spread; if he loses, the broker keeps any profits earned.
Currency trading is where a broker buys and sells currencies for their own account. Brokers buy currencies when they think the value will rise and sell them when they think the value is going to fall. In order to do this, they need to have access to large amounts of capital.
Commissions
Commissions vary depending on the type of brokerage firm. Most firms charge a flat fee per transaction, while others charge a percentage of the total traded volume.