In recent times, trading has become more popular than ever. With apps in each of our pockets making all kinds of trading accessible to the masses. This has been exacerbated by the Covid-19 pandemics, lockdown, and more people choosing to try and make money from home.
These things combined have led to a massive increase in people taking up trading stocks and currencies; forex being extremely popular. This is where forex brokers come in. These brokers facilitate forex trading for anyone and everyone. If you are interested in forex trading, you’ll need to choose a broker. In this article, you will learn everything about forex, brokers, what they do and why you need one.
What is Forex Trading?
In effect, forex trading is a simple idea. You buy and sell currencies against one another in the hope of making a profit. Currencies are bought and sold in pairs, for example, EUR/USD. The “base” currency, EUR in this example, is sold for its equal value in USD, the “quote” currency. In doing this particular trade, you would be hoping that the US dollar goes up in value against the Euro, making you profit.
It is not quite as simple as that, however, as interest rates, economic climates, and various other factors can quickly cause fluctuation in any given currency’s value. So, you can’t simply buy and sell and hope for a win. Well, you could, but that is not advised! Instead, people spend hours studying markets potential fluctuations, reading the news, and making informed decisions about what they want to trade.
What is a broker?
A broker, then, is a provider of a platform for you to trade on. You do not need to manually visit a bank and deposit money then withdraw it electronically. Instead, you can buy and sell using money on a brokerage. These platforms are much like trading apps or investment apps in other fields. The broker provides and executes the trades as and when you choose to make them. They also provide a whole host of other features, more of which we will discuss later.
Where to find a broker
To find a broker, it’s easiest to look online. They are usually geographically tied, meaning you often can’t use a brokerage from another country. Search for forex brokers in New Zealand for example, to help you find a broker in your country. This way, you know you will be able to access all their features and have no geographical restrictions placed on your account.
It is always worth asking the opinions of anyone else you know who trades currencies. They may use a platform that they can recommend and think is suited to you. If you are a total beginner, it’s best to find a brokerage geared towards beginners. These platforms often make trading look and feel far easier, using less complicated jargon or confusing terminology. Sometimes, beginner brokerages have fewer features than a more professional ones, but that should not be an issue for a first-time trader.
Why do brokers exist?
As explained, brokers act as the middleman between you and the available currencies. But why does this system need to exist? Well, this is simply the way the trading world has developed. Prior to the online boom and advance in technologies, people who wanted to trade currencies would have had to do so manually. You would have needed to have strong contacts at a bank and hold large amounts of physical cash, to go buying or selling at a bank branch. Only the wealthy or well-connected could trade currencies easily before brokers came along.
Choosing a brokerage
What are you looking for when you choose a broker, then? Firstly, you need to check what features and instruments they have. These can be various currencies, stocks, bonds, CFDs and other tradable assets. The more they have, the better. But, for beginners, you’ll likely just stick to currency pairs, so just make sure any broker you are looking at holds various currencies that interest you.
Next, you need to be sure that you’re trading with a regulated broker. In every country, there are different financial institutions that oversee and regulate trading companies. Any brokerage you manage to find will likely be regulated, but it never hurts to check. Better to be safe than sorry when we’re talking about your money!
Trusting a Brokerage
On that note, there are a few other things to look for when choosing a brokerage, all involving trusting your money is safe. For a start, take a look at their deposit and withdrawal limits and rules. Some brokers keep your money tied up for a while, meaning you cannot make quick withdrawals. If having quick access to your money is important, this sort of feature could put you off certain brokers.
Secondly, take a look at their customer service. Many brokers now offer 24/7 chat features and emergency contact details. If you are putting large sums of money into a brokerage, you want to be sure that there is support there for you if you have any important queries or worries.
How do they earn money?
You may be wondering how forex brokers make money from all of this. There are a few key ways. Most regularly, brokers take a commission on trade profit. This can be calculated in a few ways, but in effect, it means that you will pay a fee based on any profits you make. Other brokers charge other fees, such as fees for inactivity or monthly subscription fees. When choosing a broker, it’s important to weigh up all their fees and compare them against other available brokers. Failure to do so could lead to you paying out more than is necessary, having had the option to trade with a broker who charged lower commission rates.
That, then, is the basics of forex brokers. You should now have an idea of where they came from, what they do and how they make money. As you learn more about forex trading and decide on what you’d like to trade, it will be easier for you to choose a broker that suits your needs.