How do forex brokers make money?
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This guide explains the different ways forex brokers make money. We explore the two main methods they use to generate profits, and take a look at the other strategies they use. Read on to learn how forex brokers make money and discover if they ever lose it.
Broker fees
The main sources of income for forex brokers are fees. This includes spreads and commissions. Some charge both, while others charge one or the other. Below is an explanation of each.
Spread
The bid/ask spread is the difference between the buy and sell price of any currency pair. Spreads can be either fixed or variable. Fixed spreads are offered by dealing desk, or market maker brokers. Variable spreads are offered by no dealing desk brokers such as STP or ECN platforms.
Fixed spreads are usually higher than using variable spreads. One benefit of using a fixed spread broker is that you will always know what you’re paying. It’s also likely that you will pay no commission. Low spread forex brokers generally use variable spreads but you will probably have to pay a commission each time you trade.
Below is an example of a few currency pairs including their spreads. First you’ll see the pair, followed by its sell and buy prices. Spread is the difference between the two and can be seen in the last column and is how the broker makes its money.
Commission
Some brokers make money through charging a commission to traders each time they open and close orders. ECN and STP forex brokers charge fees to make money from traders paying variable spreads, which are extremely low. Commissions are quoted as round-turn (RT), which means you’ll pay a fee for both opening and closing your trade.
A typical commission charge is $3.50 RT per lot traded. This means on a standard lot for any currency pair the broker will make $3.50 when you open your trade and $3.50 when you close it, for a total of $7. Some low commission brokers charge considerably less than this, while some let you trade different lot sizes and adjust the commission according to the size of your trade.
Other fees
In addition to spreads and commissions, forex platforms can make money through other services and fees. Below is a short breakdown of other ways forex brokers make money:
- Payment fees. Some platforms charge to deposit or withdraw money for using certain payment methods. Usually bank cards and transfers are free, although third party apps like PayPal or Google Pay may prompt your broker to charge a fee.
- Inactivity fee. Most brokers have a clause in their terms that states you’ll be charged money if you don’t use your account for a certain amount of time. Usually this is a 12 month period but can be shorter depending on the platform.
- Subscriptions. This can include trading signals, expert market analysis, forex news, data feeds, among others. Most forex brokers offer lots of these services for free, although some platforms charge for premium subscription services.
Do forex brokers lose money?
They can, but it depends on the type of broker. Brokers can only lose money if they are trading against you as a market maker. Market makers are typically banks or hedge funds, but some brokers operate in this way. A market maker broker acts as a counterparty to their clients.
This means that every time you take a trade, the broker will take the opposite side of it. The broker has full control over prices and spreads. However, if you close your trade in profit, the broker will take a loss. Market maker forex brokers can lose money, but as the rate of success among retail traders is so low, the broker will generally profit over the long term.
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