Forex companies constitute the most important link of the investment process with their functions and benefits. In its simplest form, it can be said that these companies, which act as a bridge between the market and the investor, actually operate in a similar way to a foreign exchange office. But just knowing this is not enough. In this article, we explained how forex brokers make money.
What Do Forex Companies Do?
To trade forex, the world’s largest and most developed financial market, you need some tools and institutions that will make your job easier as an investor. One of them is undoubtedly forex companies known as brokerage houses.
The job description of these companies, which is very important during investment, is quite broad. They offer the following services;
- They ensure the security of your investment.
Intermediary institutions that connect you to forex, the world’s largest financial market, enable you to perform your transactions safely. They offer the necessary brokerage service for you to evaluate your money under the same opportunities as the whole world.
Forex companies, which form the bridge between you and the market, are the centres where you most need to buy and sell investment instruments, and with this aspect, they constitute an important element of the capital market.
- They create the necessary environment for the transmission of your orders to the market
Forex companies work with a different system than other brokerage houses and brokers. For example, the stock market orders are transmitted to the brokerage house by the investor, and the brokerage house is responsible for transmitting this order to the stock market. In other words, you cannot send orders directly.
But forex companies do not have such a duty. They provide the necessary environment for you to transmit your own order to the market and mediate the realization of your transaction thanks to the technical link they have established.
You also do not pay any commissions or transaction fees to forex companies. You also do not incur costs such as salvage.
- They perform similar functions as exchange offices
In fact, the work these companies do is quite similar to that of the exchange office. While there is physical buying and selling of the instrument in exchange offices, intermediary institutions generally operate through online platforms.
The exchange office is both the buyer and seller of the currency. It sells you foreign currency for the money you have at the current prices or buys the currency you have.These received coins are sold to the central bank at the price announced by the country’s central bank. In this way, the exchange office profits from the difference between the buying and selling price. Earnings differ depending on the size of the exchange office’s trading volume.
If the transaction volume is large, the buy-sell price difference will also decrease. In the Forex market, the price difference between buying and selling is called the spread, and this is the first source of income for these companies.
This transaction, which takes place in the exchange office, also takes place in forex companies. Of course, there are some changes. First of all, the trading volume is larger in the forex market. Therefore, the difference between buying and selling prices will be less. When you buy dollars in the forex market, the selling party actually becomes the international market.
While the main addressee in the exchange office is the central banks, in the forex market it is the big banks. Forex companies get the price from the big bank. It transmits your order directly to the bank at the same price. Regardless of your profit or loss situation, the only way to earn is this buy-sell price difference.
- They offer various opportunities to investors
Although there are many forex companies operating in various regions, it cannot be said that each of them provides the same quality service. But in general, they aim to provide a more comfortable and risk-free investment process.
After all, they offer various services such as free training opportunities to understand the market, teaching you how to use the advantages of the market, and advising your investment.
These companies, which are a great help for inexperienced investors to learn the markets in all details. They offer many resources such as ebooks, print books, informative videos, webinars and demo accounts.
- They ensure your transactions are performed in compliance with the law
Brokerage transactions, which are legally executed under the supervision of various regulatory bodies, ensure that your investments are in compliance with the law. It is also important for ensuring order and justice in this market.
Thanks to these audits, which are beneficial both for the survival of companies providing intermediary services and for the markets, your investments are secured. Authorization certificates are given to the companies that are already in compliance with all the conditions after the necessary audits.
How Do Forex Brokers Make Money?
These companies, to which you blindly entrust your investment transactions, make some profit from their work and survive in this way. Spreap, swap and market maker concepts are the most populars.
What is spread?
Let’s explain the what is spread by giving an example from exchange offices in this market, which is especially suitable for foreign exchange investment. Considering that you are trading dollars, you prefer exchange offices to buy dollars.
Even if you think you are going to trade at the current dollar rate, exchange offices add a little to the normal exchange rate, increasing the cost of money. That is, when selling at a more expensive price, you pay the difference between buying and selling as an extra cost. Here, this difference is the profit of the exchange offices.
This situation, which is also valid in banks and jewellers, has resulted in such places being less preferred today. Compared to all these intermediary places, forex companies offer their investors much lower trading differences. This can be explained as a spread.
Forex brokers with low spreads are preferred by investors. Since the risk that investors bear is as much as the spread amount they pay, this rate is also taken into account in the change in instrument prices.
What is swap?
Swap is also very popular term being used in the investment environments.Basically, keeping your position open for a specific amount of time gives you swap returns.
We can say that the plus or minus overnight carrying cost, which is reflected in your account according to the interest difference between the foreign exchange transactions you have made in the Forex market, corresponds to this concept.
For example, let’s say you are investing in USD/EUR. As long as you hold this parity, that is, if you are in a buying position, you will experience an overnight interest fee (swap) deduction.
You also get swap income when you switch to the sale transaction. This is related to the different interest rates of currencies.
The interest rate applied for the exchange rate in the market and the price the company deducts from you may vary. The higher the swap price, the higher the profit will be. Therefore, you should definitely pay attention to which company receives how much swap price for which vehicle.
What is market maker?
Firms that gain in this way can be risky. Because they do not transmit the orders they receive from customers to the market. As the investor makes a loss, they make a profit, and as the investor makes a profit, they make a loss.
Of course, not every brokerage house resorts to this method to make a profit. This practice, which is a legal situation, only breaks the trust of some investors. However, the important thing is whether the firm fulfils its promise of payment to the investor.
Forex brokers that apply this earnings method, also called treasury, cannot be expected to present the correct data to their investors since they will profit from the loss.
Issues such as the price of the instrument, the company’s analysis and investment advice will likely not reflect the truth. All this is solved by the investor choosing reliable sources.
How to Choose a Good Forex Broker?
If you have taken a step to evaluate your savings in the world’s most liquid market, the most important step in this process is to determine which brokerage house you will continue with. Making the right choice is essential.
The interest in the market has increased due to the fact that Forex companies have become reliable after regulatory audits and investors understand that these companies are as safe places as exchange offices.
You should take care to make your choice among companies with authorization certificates. In addition, if you want to have information about forex, you can attend free training of companies.
These training are not binding. It is entirely your own decision whether or not to enter the market after obtaining information. This alone is enough to reassure investors.
In general terms, you should consider the following factors when choosing among forex brokers;
- Be sure to see if it has a license.
- Make sure that you are working with an expert and experienced team in the field.
- If you are going to work with a foreign brokerage firm, pay particular attention to whether it has an office in the regulated country or region.
- Evaluate the service quality of the investment advisory and technical support team it provides.
- Check out that they are also on the level in terms of having facilities such as free training and virtual accounts.
- Make sure they ask for a low collateral amount.
- Be sure to check whether the analysis and news it gives you are up to date.
- Finally, see what your overall satisfaction is with the company you will choose. If the investors are mostly satisfied and their investments are safe, you can choose this institution with peace of mind.
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