Trader Education
How Forex Brokers Make Their Money
16 Jan 2013
Every time you make a currency exchange, you have to pay the broker to carry out the transaction. This is how they stay in business. However, you may well have seen adverts for foreign exchange brokers that do not charge a commission, and wonder how they make any money out of it. The truth is that all brokers charge a commission – it’s just that some of them factor it into their pricing. Whenever you see a currency pair listed on a price board or an electronic trading platform, you will usually see two prices quoted: a bid (buy) price and an ask (sell) price.
These are different because the commission for each type of transaction has been figured into the price, so you would have to pay more than the true exchange rate in order to buy the quote currency, or you would receive less than the true exchange rate if you were to sell the quote currency.
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The difference between the bid price and the ask price is known as the ‘spread’. In order to make a profit from a forex transaction, you have to ‘beat the spread’ – which is to say that the price has to move in the desired direction by more than the spread amount if you are going to profit from the trade. This is why forex brokers often advertise themselves as having ‘tight spreads’, as tighter spreads make it easier for traders to make a profit.
This is more of a concern when you are trading for short-term gains, as the small movements in price over the short term can often be gobbled up by the spread. Longer term price swings tend to be larger than short term ones, which makes the size of the spread less important. However, if you keep a trade open overnight or longer, you will often be charged ‘carry fees’, which can also chip into your profits.
