Well, you may have heard about forex brokers either from your colleagues or from the internet. But if you do not have any previous experience of trading, then you might wonder what does forex brokers do or what is their role in trading? Moreover, if you are feeling interested to enter the Foreign exchange trading market, then you should have to find the best forex trading platform for yourself.

In this post, we will tell you the role of forex brokers in trading so that before entering into the trading market, you can get a clear image of this. Stay connected and keep reading. 

Who are forex brokers:

In simple terms, forex brokers are mediators who connect buyers and sellers in the forex trading market.  Seeming difficult? Okay. Let’s go through this example to understand this more clearly. Suppose you want to buy potatoes. So, being a buyer, where would you go? You would go to the market to buy potatoes.

Similarly, being a seller, if you want to sell potatoes, you will also come to the market to find your potential buyers. So, the market is the place where buyers meet sellers. But do they buy or sell potatoes to each other individually? Nope. They go to the shop where sellers sell and buy from them. So, there needs to be a platform to better run this trading process.

The same rule applies to forex trading also. Forex market is full of buyers and sellers with diverse currencies, and there should be a common platform to facilitate the process of buying and selling. In addition, unlike the normal market scenario, in the forex market, both buyers and sellers can be a hundred miles away from each other. So, it requires a mechanism to match buyer and seller interest. This is where the role of forex brokers lie.

What forex brokers do?

In the foreign exchange (forex) market, a forex broker is a place where both buyers and sellers come to exchange currency. So, forex brokers are middlemen who connect between you and the trading market. In other words, if you are a seller of currencies, then you would go to the forex broker to find the right buyer, and the forex broker is the medium that will match up with the right buyer and vice versa. Forex brokers primarily work on the OTC (Over The Counter) market. Forex brokers are not mediators between you and the market, but also they are the mediator between you and the liquidity provider. 

Liquidity provider:

It will be easy to understand who are liquidity providers if we first know what liquidity is. If you are a buyer and want to buy currency, then there needs to be a seller from whom you will purchase. And the same way, being a seller, you need buyers to sell your currency.

If the market gets congested with potential buyers of your mentioned currency, then the probability for you to sell your currency will rise. Similarly, if there are plenty of sellers in the market who are selling the currency you want to buy, then your chance of buying will surely increase. Thus, when the market becomes full of buyers and sellers, then we say that the market is in a ‘liquid’ state. 

The market can also be liquid differently. Suppose, instead of plenty of small buyers and sellers, if there are fewer buyers and sellers with a high chunk of currency, then also we can say the market liquid. Those who sell currency in a large amount are known as liquidity providers. In this case, whether you buy orr sell, a forex broker matches you with a liquidity provider to take the other side in the trade.

How forex brokers make money?

As forex brokers play the role of mediators during trading, so they take a certain percentage as a form of commission from each trade or spread. This way forex brokers earn money. A spread is basically the amount that differentiates bid price from ask price. The price you get by selling a currency is called bid price. Alternatively, the rice that you pay to buy a currency is known as bid price. A broker keeps this difference amount as spread for mediating. A broker can also charge you both spread and commission for a single trade, while some may provide you commission-free trading.

Final thought:

You need to be very cautious if you want to enter into the forex trading market because a lot of traders have lost their money being the victim of fraudulent schemes. Different forex brokers offer different quotes and thus, gaining some basic knowledge on forex brokers will help you with better trading experience.