Many of you must have seen glossy ads for Forex Trading claiming a great amount of profit & a high leverage. Although it would not be proper to say that all the claims are sham, one can safely say that the claims are always inflated to attract gullible investors. No doubt, it could lead you to the path of prosperity provided you are well equipped with proper strategy & in-depth analysis.
Here the need for forex broker comes into picture. This article would discuss the meaning & rational for existence of brokers in the currency market.
As many of you must be knowing the forex trading is mainly of OTC (Over the counter) nature. Now what do we mean by OTC? OTC means ‘Non Exchange Traded’. Let me elaborate this a little more. In case of Equity (stocks) & Futures the trade occurs on one or more Stock exchanges. In case of OTC products, which includes Forex, the trading that is buying & selling is done between the private parties & they are in more vicinity than any trade you may enter for Equity & Futures. When you buy or sell any equity or future you buy it from the Stock Exchange & you don’t know who is selling what the scrip you are buying or vise- a-versa.
Conversely, in case of OTC trades you are buying & selling from individual parties as no designated place such as Stock Exchange is involved.
Coming back to Forex trading, OTC in this context means Over the Counter of Banks & other Financial Institutions who usually trade currencies in millions & greater amounts.
This accounts for the major part of total world wide currency trade.
Now you would ask then how come it would be possible for us to start trading with a few hundred Dollars as many of the Ads claim that you can definitely make a start with small amounts like $500? This is possible due to brokers.
Although the majority of forex trade occurs at Banks’ & FIIs’ level the forex brokers facilitate for retail forex trade where individual investors can trade forex with a small & affordable amount.
Forex brokers acts as a link between the big market (where large dealers like banks & FIIs trade) & the individual retail traders.
So why do we need brokers? The first & most important reason is to facilitate the individual retail investors to enter the forex market although indirectly & that through forex brokers. Brokers trade with the collective amounts of all small retail investors.
Now once you start the trading through the forex brokers what next?
You need to make reasonable profit from the forex trading. Believe me, its not an easy task to make instant profit as many of the programs claim. To make a profit from forex trading you need to understand all the intricacies of forex trading. As all of you know the forex trading is 24×7 & is carried out all over the globe. To do any analysis you need trading data. In case of listed securities the data can be easily available through Exchanges. However, in case of forex trading the data is not so easily available mainly because of dispersion of trading places across the markets over the globe. Also the traders being individual parties the data is not in a standardized format.
A forex broker could help you to understand the market & may guide you with their own analysis. Forex brokers can afford to hire specialized professionals who do all the complex market analysis & help you to make a trading decision.
To summarize a forex broker is a link between the retail investor & larger market players who facilitates the retail traders to enter the market who otherwise could not have entered due to the large amounts involved.
Following points would summarize the rational of there being forex brokers in currency market:
1) The amount involved in forex trading is usually very huge. Forex brokers are required for an individual retail forex trader to enter the market. This is facilitated by the leverage which many forex brokers usually offer.
2) The individual retail investor might not be well versed with all the technicalities of Forex trading. So without an analysis of the market it could be a fatal thing to trade & the trader might end up losing all the capital.
3) With proper guidance & tips from the forex broker one can reap the benefits of speculation in the currency market.
As all of you would agree, you should be very careful while selecting the broker. This is really important because the whole fortune of your forex trading endeavor depends on the expertise & honesty of your broker.
In case of normal exchange traded securities like stocks & futures you are dealing with the Stock Exchange & the risk of contract for buying & selling of securities not being honored by any party (Yourself or the Exchange) is NIL. The exchange takes the guarantee that all the contracts are honored as agreed between the parties involved.
In case of forex trading, in the absence of designated exchange, the risk of default from either side is high. (This risk is prevalent in almost all kind of OTC products).
Forex trading although of OTC nature is now a days well organized & regulated. You need to check that whoever broker you select should be well regulated & should follow the underlying guidelines as might be prescribed by the Regulating Authority.