DEFINITION of 'Forex Broker'
Forex brokers are firms that provide currency traders with access to a trading platform that allows them to buy and sell foreign currencies. A currency trading broker, also known as a retail forex broker, or forex broker, handles a very small portion of the volume of the overall foreign exchange market. Currency traders use these brokers to access the 24-hour currency market.
BREAKING DOWN 'Forex Broker'
Forex brokers are compensated two ways; firstly through the bid-ask spread of a currency pair. For example, a retail forex broker may buy euros for 1.2010 U.S. dollars and, at the same time, sell euros for 1.2015 U.S. dollars. The spread, in this case, is $0.0010, or 10 pips. Secondly, brokers will often charge a fee per transaction. However, competition in the forex broker has increased in the last five years, which has seen many offer free or very small transaction costs.
Forex brokers will allow customers to trade all major currency pairs; EUR/USD, GBP/USD, USD/JPY, and USD/CHF as well as the remaining g10 currencies and all the cross rates. Additionally, most brokers will allow customers to trade emerging market currencies. (Further reading: What are the most common currency pairs traded in the forex market?)
Before trading, a forex broker will require customers to deposit money into their account as collateral. However, through leverage, customers can trade larger amounts than what is deposited in their account.
It is valuable to do some research to find out whether a broker has an excellent reputation and has the functionality that you are looking for in a broker. Most major forex brokers will allow prospective clients to use a practice account so that they can get a good understanding of what the system is like. It is a wise idea to test out as many platforms as possible before deciding on which broker to use.
Furthermore, because the forex market is a 24-hour market, most quality forex brokers will provide 24-hour customer service. (Further reading: 5 Tips For Selecting A Forex Broker)