In any investing opportunity, it’s smart to have professional help if you don’t happen to be a financial professional in your own right. Paying a broker to help you navigate the tricky waters of financial investing can earn you more money in the long run, even despite the increase in start-up costs.
When investing in securities and stocks, brokers typically send customer orders through independent exchanges and charge commission to the customer for each trade executed, regardless of whether the stock makes, or loses, money. In contrast, foreign exchange brokers handle executing the customer orders themselves because there are no centralized currency exchanges. The value of the exchange is set by the country that owns each currency. Not having to deal with a central exchange allows the brokers to make money in two ways:
- Brokers try to buy low, and sell high, whenever possible, as any investor would. However, the Forex brokers make money off of the difference between the purchase, and sale price of the currency, while stock brokers make a commission off of the purchase of the stock, and those commission rates are set prior to the purchase. Forex brokers can set their rates at whatever proportion of the spread that they choose.
- Brokers also earn money off of a portion of the spread associated with your currency exchange. The spread is the difference between the bid price for a trade, and the actual price. The bid price is what you, the investor, would receive, and the ask price is what you’ll have to pay. The difference between the two is the amount the broker bases his or her fee on. The spread can also be a fixed or variable rate, and it is important to know which, before you make an investment. A change in interest rates or other market event could either help you or hurt you depending on which way the change affects the value of your investment. A decrease in the spread could result in fewer profits to you, because your broker’s commission percentage would be fixed, while the spread might not be. Some brokers take fees on both the spread and on the sale, so make sure you know which your broker or brokerage agency takes, before you agree to open an account with them.
The difference between the two revenue streams is that one is paid to the broker, and earned by them, up front while the other is earned after you sell.
While going it alone might seem like the best way for you to maximize your own profits, and minimize brokerage fees, you still run the risk of losing more money than you make, due to inexperience with spotting market trends. Keeping yourself informed regarding the commission and fee structure of any broker you choose to work with will prevent any surprises when it comes to purchasing or selling your currency investments, and will also guarantee that you have the professional help you’ll need to make sound investment decisions.