The number of forex brokers in the world is roughly in the thousands, and each of them is competing to acquire clients. However, not all of these brokers provide quality service. In fact, some of them operate under false pretenses, which is why it's vital to have an eye for distinguishing the good ones from the bad. By reading this article, you'll know why having a broker is necessary, and by identifying a few considerations, you'll learn how to select a forex broker that's best for you.
What is a forex broker?
A forex brokerage is a company that connects currency traders to the currency market through an electronic trading platform.
In the past, brokers pertain to individuals transacting on behalf of investors, but today, it's more synonymous with a company, a brokerage.
Why do you need a broker?
When you think about it, brokers act as intermediaries between you and other traders. They facilitate the transactions for a fee. So, you might be wondering why there's a need for a go-between to trade currencies. Why not just find a buyer or a seller in the market and deal with them directly?
Well, you can.
If you can find someone willing to exchange currencies with you at an exchange rate that both of you can agree on, then that fills the bill.
However, for you to profit, you need to find someone who'll readily buy the currencies you purchased at a higher exchange rate. Now, if you get the picture, that is the obstacle that your broker eliminates unless you already have a network of at least a hundred people who own stockpiles of currencies that are ready to be traded.
Trading without a broker
Why not trade directly with a bank or a currency exchange?
You can trade a thousand dollars at a time with a bank without a fee, but for amounts above $10,000, you may need to visit a financial center, which is the case for Bank of America.
You can also do this with a currency exchange center, but the downside in doing this is the very high markup, which doesn't help in speculating for profit. Plus, trading currencies in this manner lacks leverage, which means you can't put down a fraction of the trade size you wish to control.
Therefore, if you can agree that a broker is necessary to find other traders instantly and transact with them in seconds for a very low markup -- not to mention, your access to leverage -- then you can proceed reading.
What do you need to consider from your broker?
Why is it so important for a broker to be regulated? Well, it's for this simple answer: the regulatory body is what stops brokers from being in complete control over their investors' funds.
Because if brokers have full autonomy -- meaning that no one oversees them -- they can do pretty much anything with their investors' money.
Regulation safeguards you from fraudulent activities or any action from your broker that only satisfies their interests. Unregulated brokers who run scams can manipulate prices, forestall withdrawal, and possibly even sell their investors' information to third parties.
The regulatory bodies
Forex brokers in the US should have a membership with the National Futures Association (NFA) and regulated by the Commodity Futures Trading Commission (CFTC). Brokers in the UK must be registered with the Financial Conduct Authority (FCA).
Other countries have regulatory bodies of their own, but what's important is you understand the extent of their power over the financial firms within their jurisdiction.
Support doesn't pertain to how brokerages handle customer concerns and complaints only; it also covers their learning resources and the market analysis they provide to clients.
The best way to assess if brokers do an adequate job of providing support is to do a little inspection of your own.
Here are a few ideas:
Reading reviews about the broker you're considering is one way to get to know the company even more from the perspective of other traders. It's best if the traders who reviewed your broker offer detailed comments about the brokerage's services.
Download their demo
Trying their demo accounts is one idea to understand how their platform works and its available tools. It also gives you an idea if their sales team is pushy. Some brokers employ very obtrusive sales staff in that they will call you almost every day to convince you to open a real account.
Stay away from these brokers because this may be indicative of possibly lousy customer service. Why? Well, if they're obtrusive to call you every day, it means that they don't respect your time and decision. They're just keen on imposing their will in reeling you in as a client.
Try a small account
You may have a hundred grand ready for trading, but one trick to get a feel for their customer service and overall product and service is to start small.
First, throw in $100 to your trading account. After some time, call or email the customer support for any question or concern you may have. Then, take note of how quick they were to respond and how they treated you.
The products are fairly easy enough to assess because your job here is to look at the financial instruments you can trade with them. Do they have all the major and liquid currency pairs?
Do they offer the currency pairs you want to trade? Are all the commodities offered?
All the available financial products are most likely published on their website or are available in their demo trading platform.
Spending a few minutes of your free time to examine the contents of their site will allow you to soak up as much information as you need about their offerings.
Forex broker fees
Lastly, you need to check for three things: commission, spread, and fees. The following are some sample questions you can ask your broker:
So, this marks the end of this blog post. If you liked this article, let us know by dropping us a comment below or share this on social media to help your friends find the right broker for them.
Minimum Deposit: $50
Spread (EUR/USD): 1.1 with Standard Account
Regulation: FCA, CFTC, FSA, IIROC
BROKER: CITY INDEX
Minimum Deposit: £100
Spread (EUR/USD): 0.69 with Standard Account
Regulation: FCA, ASIC, MAS