What Are Forex Brokers? Here’s What You Need To Know
If you look at it, Forex trading sounds like an absolute dream. Working on your own time at home? Answering to no one? Making money from your phone or your laptop? Sounds like a dream indeed. But in Malaysia, Forex trading is not as big as it might seem. Why is this? Simple. Due to the scams. Due to the inherent nature of the business, Forex trading is fraught with scams. And too often than not, these scams comes in the form of a Forex broker. Which is why in this article, we’re going to discuss what exactly is a Forex broker, and what are the things you need to look at first. Welcome to our complete guide on Forex brokers.
What You Need To Know About Forex Brokers
But before we can discuss about how to choose a Forex Broker, we need to fully understand what are Forex brokers, and what they do. So let’s get down to it.
What Are Forex Brokers?
Alright. In the simplest of terms, Forex brokers are defined as the people/institution/firms that provides the platform for traders to buy and sell foreign currencies. Forex brokers are also known as retail Forex brokers or a currency trading brokers. Most Forex traders use these brokers to gain access to the 24-hour currency market for speculating purposes. Although there are stand alone Forex broker firms, investment banks also provides Forex broker services for their users as well.
What Is The Role Of A Forex Broker?
As mentioned earlier, Forex brokers are used mainly for the access they provide into the 24-hour currency market. With the help of a Forex broker, a trader can open a trade by buying a currency pair (Eg; EUR/USD), and selling the same currency pair for a profit or a loss.
Another important role of the Forex brokers are that they can also provide leverage for traders, which means that they can trade for higher amounts of money than they deposited. However, this is a high risk/high reward strategy as trading for higher amounts of money than you have might also mean losing money than you have.
How Does Forex Brokers Make Money?
Alright, so now we understand what exactly is a Forex broker, let’s discuss how they are compensated. Usually, there are two main ways where a Forex brokers are compensated.
The first one is by collecting the bid-ask spread of a currency pair. Here’s a simple example; let’s say that the EUR/USD currency pair is priced at 1.20010 bid and 1.20022 ask, the spread is .00012. If a trader opens a trade at the ask price and closes the trade at the bid price, the Forex broker will collect the spread amount.
Another way is by collecting additional fees. Some Forex brokers may charge a fee per transaction, some might charge a monthly fee to access some special software or information, or even registration fees. However, most Forex brokers are moving away from this way of compensation because of the sheer amount of competition between Forex brokers now. So more and more Forex brokers are coming around to giving almost everything for free, as it helps them get more traders on their platforms.
There is one more way for Forex brokers to get compensated, and that is by carrying out their own trading operations. However, this is not advisable as there might be a conflict of interest between their trades and their traders’, especially when their trades clash with their traders’ trade. However, nowadays there are strict regulations in this area which helps reduce this practice.
Who Oversees The Forex Brokers?
Now that we have an idea of what a Forex broker do, what is their role, and how are their compensated, let’s talk about the most important part. Who regulates the Forex brokers? As you can see from our explanation of the Forex brokers, you can also see that they have a lot of power and money. Traders are literally putting money in their hands. So this means that an independent body needs to be established so that the Forex brokers don’t abuse their power.
Here’s where the regulation institutions come in. All Forex brokers need to be recognized and regulated by these entities, in order for them to be truly legitimate and trustworthy. Almost every country has a regulation institution of their own. Here’s an example; for a Forex broker in Malaysia, the Securities Commission of Malaysia is the regulation institution that will be overseeing their practices and activities. In the US, they have the Commodities Futures Trade Commission (CFTC) and the National Futures Association (NFA) as their regulation bodies.
So in conclusion, Forex brokers are an important entity for anyone who wants to try Forex trading. They have a mutual relationship with traders and they rely on each other. So in order for you to be successful in Forex trading, you should make sure to choose your Forex broker carefully. If you want more tips on how to choose your Forex brokers in Malaysia, then head over to our article where we dive into this in more detail.