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 known be as a retail forex broker or a currency trading broker.
Understanding the Forex 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.
Key Takeaways
- Forex, or foreign exchange, trading is primarily between pairs of currencies of the nations that are represented in the G10.
- The clients of forex traders are currency speculators or investors for large institutional clients.
- Interested investors have a number of choices among forex traders online.
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.
Opening a Forex Account
Opening a forex trading account these days is quite simple and can be done online. Before trading, the forex broker will require a customer to deposit money into the new account as collateral.
Brokers also provide leverage to customers so they can trade larger amounts than they have on deposit. Depending on the country the trader is trading from, that leverage can be 30 to 400 times the amount available in the trading account.
High leverage makes forex trading very risky and most traders lose money attempting it.
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.
The forex industry is regulated by the Commodity Futures Trading Commission and the National Futures Association.
Competition among forex brokers is currently intense and most firms find they must eliminate as many fees as possible in order to attract retail customers. Many now offer free or very small trading fees beyond the spread.
Some forex brokers also make money through their own trading operations. This can be problematic if their trading creates a conflict of interest with their customers. Regulation has curtailed this practice.
Regulation of Forex Brokers
The industry is regulated by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA).
Anyone considering opening a forex account can research the available brokers through the NFA website or through Investopedia's broker reviews.
FAQs
A foreign exchange broker, also known as an FX broker or a forex broker, buys and sells currencies on behalf of clients while charging a commission for the service. Foreign exchange brokers are 'middlemen' who match the currency buy and sell orders from their clients to other clients orders.
What is the meaning of forex broker? ›
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.
What does it mean to be a regulated forex broker? ›
Put simply, a regulated Forex broker is an organisation that must adhere to a set of strict rules put forth by respective regulatory bodies to offer Forex trading services. These regulatory agencies ensure brokers operate ethically, providing transparency, integrity, and protection for the trader's capital.
What is the regulation for forex? ›
Foreign exchange regulation is a form of financial regulation specifically aimed at the Forex market that is decentralized and operates with no central exchange or clearing house.
Are forex brokers regulated? ›
Yes, forex brokers are legal in the U.S., but they must be registered with and regulated by the Commodity Futures Trading Commission (CFTC) and be members of the National Futures Association (NFA). This ensures compliance with strict financial standards and offers protection to traders.
What is the difference between forex and broker? ›
The forex market involves the buying and selling of currencies. In contrast, an equity broker primarily focuses on facilitating trading in equity markets, where stocks and shares of companies are bought and sold.
What is forex in simple terms? ›
Forex (FX) refers to the global electronic marketplace for trading international currencies and currency derivatives. It has no central physical location, yet the forex market is the largest, most liquid market in the world by trading volume, with trillions of dollars changing hands every day.
Are forex brokers safe? ›
Forex trading itself is not a scam, but there are certainly scammers who use the industry as a way to take advantage of unsuspecting investors. These scams come in many forms, from unscrupulous brokers to fake trading systems.
What is an example of a broker? ›
A broker's prime responsibility is to bring sellers and buyers together, and thus, a broker is the third-person facilitator between a buyer and a seller. An example would be a real estate broker who facilitates the sale of a property. Brokers can furnish market research and market data.
What is broker regulation? ›
Brokers register with the Financial Industry Regulatory Authority (FINRA), the broker-dealers' self-regulatory body. In serving their clients, brokers are held to a standard of conduct based on the “suitability rule,” which requires there be reasonable grounds for recommending a specific product or investment.
Visit FINRA BrokerCheck or call FINRA at (800) 289-9999. Or, visit the SEC's Investment Adviser Public Disclosure (IAPD) website. Also, contact your state securities regulator. Check SEC Action Lookup tool for formal actions that the SEC has brought against individuals.
What if a broker is not regulated? ›
Without regulation, there is a risk that the broker may engage in fraudulent or unethical practices, such as misappropriating client funds, manipulating prices or trades, or failing to disclose important information. If such practices occur, investors may not have any recourse or protection against losses.
Who regulates forex trading? ›
The CFTC is the Federal agency with the primary responsibility for overseeing the commodities markets, including foreign currency trading.
Who regulates forex transactions? ›
The Reserve Bank of India, is the custodian of the country's foreign exchange reserves and is vested with the responsibility of managing their investment. The legal provisions governing management of foreign exchange reserves are laid down in the Reserve Bank of India Act, 1934.
What forex broker is US regulated? ›
Among U.S. forex brokers registered with the CFTC and regulated by the NFA, only three brokers offer MetaTrader, including OANDA, FOREX.com, and IG. It's worth noting that OANDA and FOREX.com offer the full MetaTrader suite, including Metatrader 4 (MT4) and MetaTrader 5 (MT5), while IG only offers the MT4 platform.
How much does an FX dealer make? ›
The average salary for FX Dealer is £58,305 per year in the London. The average additional cash compensation for a FX Dealer in the London is £21,144, with a range from £7,439 - £60,093. Salaries estimates are based on 28 salaries submitted anonymously to Glassdoor by FX Dealer employees in London.
How do FX traders make money? ›
An investor can make money in forex by appreciation in the value of the quoted currency or by a decrease in value of the base currency. Another perspective on currency trading comes from considering the position an investor is taking on each currency pair.
What is FX trading and how does it work? ›
Foreign exchange, or forex, traders speculate on changing exchange rates by converting large sums of money from currency to currency, much like stock traders buy and sell different stocks. Forex traders essentially attempt to buy low and sell high for a profit, but the asset they are trading is currency.
How does FX Prime brokerage work? ›
Prime brokerage allows a client to consolidate positions and improve execution. For example, a client may establish a foreign exchange position with several different counterparties, which are then consolidated into a single position with the prime broker.
