Be it a trading in stocks or investing in mutual funds, buying property or getting insurance cover, the one and only person who comes to our mind to help out with the process is a Broker. He has many names like an agent, broker, financial adviser or a portfolio manager. He is the person who simplifies the financial jargon and makes a layman understand the nifty grittiest of investments. He helps you fill the forms, lists the documents to be submitted and submits the applications on your behalf.
Before going into the topic of FOREX brokers let’s understand the basic functions of a broker. A broker can be an individual or a brokerage firm that acts as a middleman between the buyers and sellers in financial markets. He works as a point of contact for institutions who wish to sell different financial products. He gets a commission in return for the sales he does and sometimes he also charges a small fee from the buyers too. In case the broker is a brokerage firm, the employees working there will be assigned individual clients for whom they indulge in trading in financial markets along with offering sound research and advise regarding the market conditions and the stocks to invest in. Brokers deal in a variety of markets such as stock markets, property, and foreign exchange and so on.
Foreign exchange market:
Foreign exchange (forex) is where banks trade electronically with each other at differing prices which change from bank to bank. The FOREX market functions 24 hours a day and on all days. In earlier day , only large importers and exporters and multinational companies and huge hedging institutions were the only players in this market.
With the advent of internet based financial trading in the late 1990s, retail foreign exchange trading gained popularity. And the role of forex brokers came to the fore.
A forex broker connects the retail trader with the forex markets. You need to open a forex trading account with the broker to start trading in forex markets. You can hold the currencies you trade in this account. Opening a forex account with a broker takes a few days as it requires paperwork and identity verification.
Services provided by forex brokers:
* The brokers use multiple banks for pricing and offer clients the most competitive prices for trade.
* They offer demo or practice accounts for new clients where they can practice trading in foreign exchange and gain some expertise before investing real money. Hence, reducing the risk of loss due to inexperience.
* They offer leverage to the clients which ranges from 10:1 to 100:1 depending upon your relationship with the broker and your investment. Leverage means the broker gives you $10 to trade for every $1 you have in the account.
* They generally trade via spot currency markets but some brokers also deal in derivatives market like futures and options.
* They have a greater in-depth exposure to the market conditions and can advise the clients regarding the profitable trades.
* They offer special training programmes to the clients to increase awareness regarding different financial matters and how to minimize losses.
* They professionally manage the accounts of their clients.
How does a forex broker earn:
The forex broker charges a commission per trade or a spread. A spread is the difference between the Bid price and the Ask price. Bid price is the selling price of a currency and Ask price is the buying price of a currency. The spread is either fixed or variable. The variable spread changes depending upon the market conditions from time to time. Some brokers charge both commission and spread. The client has to go through the fine print of his agreement with the broker to know how he’s being charged for the services.
How to pick a genuine broker:
The most important Point to be checked before finalizing a broker is wither he’s a broker régulé or a non regulated broker. This is the most ignored point by a majority of investors, when they are trading in forex market. The broker will have access to your hard-earned money and can influence your trades. So keep in mind to pick a broker régulé a regulated broker has to comply with all the regulations set by the Forex regulator. He must be registered and licensed in the country where his business is based. He has to meet all the quality standards set by the concerned forex regulating authority.
A regulated broker is constantly audited and scrutinised by the regulating authority to ensure he follows all the rules and standards.
The regulated brokers are obliged to keep sufficient funds available to honour the transactions of the client and to return the balance amount in client’s account, if the brokers business becomes bankrupt. This safeguards the investments of the clients even if the brokerage goes bankrupt. The risk faced by the client is considerably reduced. The leading regulatory authorities for foreign exchange trading are NFA (US), CTFC (EUROPE), FSA (UK) and Cyprus Securities and Exchange Commission. Before selecting a broker, the client should consider the broker having registration with more than one authority over the broker having registration with only one.
Terms in Forex trade:
Before you start trading in forex market it’s necessary to familiarise with the basic terms used the trade.
* Currency pair- in forex markets currencies are always traded in pairs as the value of a currency is determined in comparison to another currency.
* Base currency- it is the first currency quoted in a currency pair.
* quote currency- the second currency quoted in a currency pair.
The action of buying or selling is always performed on the base currency.
* Pip- A pip is a unit to count the profits or losses and to determine the spread of the broker. The quote price of any currency has four places to the right of the decimal. The fourth place after the decimal is where the pips are counted. A single unit of movement is considered as one pip. The monetary value of the pip changes depending upon the size of your trade and currency you are trading.
* Lot sizes- lot is the number of currency units you can trade in. There are four lots like the standard lot consisting of 100,000units, the mini lot consisting of 10,000 units, the micro lot consisting of 1000 units and the nano lot consisting of 100 units.
Risks in forex markets:
There are also a certain risks involved while trading in forex markets which may result in substantial losses to the traders. The top five risks are
* Leverage risk which occurs because of the aggressive use of leverage in highly volatile market conditions.
* Interest value risks which may arise because of the fluctuations in interest rates of different countries which in turn affect their currency rates.
* Transaction risks associated with the time difference between the beginning and settlement of a forex contract. The higher the time difference, the higher the risk
* Country risk which arises because of instabilities in the conditions of the countries which issue currencies
* Counterparty risk which is the risk of default by the dealer or broker in a transaction