How do FX Brokers make money?
Nowadays, you see marketing and advertisements for trading firms everywhere you look.
The multitude of Football, Formula 1, Rugby and Cricket sponsorships (to name but a few) has gone through the roof!
Now as you can imagine, this sponsorship doesn’t come cheap.
Neither do YouTube Ads, TV Ads, or premium Google real-estate!
But Trading and Forex firms have the cash to splash on this type of marketing… How?
In this article we will look at the various ways that Retail Brokers make money. Most of the methods we will run you through are complete legit and above board.
However – We will let you know which sneaky/stealth charges/fees that some brokers may add, so you know what to look for and avoid when choosing your broker!
Let’s start with our first way Brokers make money here:
How do FX Brokers make money… Commissions
A fairly obvious first point to make – but a very important one. When you are looking at which broker you should open your trading account with, there are plenty of things to consider.
We won’t go into all the details in this article, but if you would like a full run-down of these points then please check out our ‘Choosing a Broker’ article here.
Commissions for different products and account types are common in the trading area. And these charges are rarely hidden.
Almost every broker that offers a variety of products will display their product offering online either directly on their site or via a downloadable document under the name of Product Information Schedule or Market Information Sheet (Each broker will be different!)
Within this article, each broker should clearly state the chargeable commissions (If any) for each of their symbols or group of symbols.
If you cannot find this information online – then email, chat or call the broker for this information.
BEWARE – If they cannot or will not give you this information – then delete your email, close the chat or end the call – They are not to be trusted!
How do FX Brokers make money… Spreads
Now, If you can’t see any commissions being charged but you can see a market information sheet or the like online, then you will most likely be able to see the typical spreads charged per currency pair or per symbol etc.
This is another common way for brokers to make their money. The wider the spread, the more money the broker will make.
The extra spread (ie the cost of buying and selling a certain symbol at the same point in time) is called a mark-up. Whatever the broker marks the currency pair up by, is the extra profit that the broker makes when you place a trade.
This spread works as a multiple. The larger the trade a client makes, the larger the profit gets made by the broker.
Some brokers may charge both commissions and mark up their spreads – But with the retail FX market being so competitive over recent years, you can usually tell which brokers are doing this when you look at spread comparisons.
You may have seen FX brokers advertising 0 spreads. These guys will often be charging commissions instead (But often won’t advertise it) or there could be some other ways for them to make money which we will get to later!
How do FX Brokers make money… Swap Charges (Financing)
An important factor for brokers to make larger profits is financing.
It’s often something that gets questioned because a lot of newbie traders don’t know what this charge refers to. New traders often think this is one of the hidden stealth charges. But it’s not.
When you trade on margin using leverage, then you are effectively borrowing funds to open up your trades. The brokers charge you for this privilege and often use the same rates as the banks, as they have access to this kind of information.
Some brokers may mark-up their swap rates (just as we saw with marked up spreads)
A good way to check the swap rates of a particular broker is to download their platform or open up a demo account. You should be able to find this information that way.
TIP – If the broker is an MT4 broker. Then you simply need to go to the market watch window, right click the symbol in question, click specification and you can view the applicable swaps (If any) in the Swap Long and Swap Short rows.
It’s worth noting that these swap charges are often tiny. Most retail traders will be charges pennies a day for this facility, moving up to pounds for slightly larger accounts.
For a substantial amount of money to be taken from the account to provide for financing, the account is usually quite a lot bigger than a typical retail account.
TIP – You can also earn from Swaps as opposed to being charged. This depends on which currency you are borrowing.
Also, if swap rates are close to 0 – Then brokers may waive them completely.
As we always say – Do a bit of research first. There’s plenty to read on our site including our ‘Choosing a Broker’ article that you can read here.
You can also view a good example of overnight spread information via one of our trading partners here.
So far – We have Commissions, Spreads and Swaps. And to be quite honest, those are the main 3 that you should familiarise yourself with as the bulk of your fees are incorporated in them.
Now let’s look at some other fee’s that SOME brokers charge, why they are charged and how to avoid them!
How do FX Brokers make money… Deposit Fee’s
Why should I be charged for paying a broker money? The broker will earn some commissions or the like from me so why should I pay to give them my hard-earned money?
If something along those lines is your first thought… then I completely agree with you. It’s a bit of a stealth fee that some brokers won’t be so honest about up front.
Our advice is to check the websites (Most have a deposit/withdrawal page) and just ensure that you won’t be penalised for sending your new broker some cash!
There may be some rarities for ‘whales’ (High net worth clients) whereby they are depositing huge amounts of money via credit card and the bank passes the cost of these transaction to the broker and the broker then passes to the client. But this is rare and won’t apply to the vast majority of traders.
So that’s it – A fairly simple charge that you can easily check for before opening your account – and again, if you can’t get an answer, be suspicious!
How do FX Brokers make money… Withdrawal Fee’s
Withdrawal fess are more common than deposit fees, but they are another charge that seems fairly harsh.
You’ve done the hard work making your profits – or maybe you’ve lost too much and decide to withdraw – Whatever side of the coin you are on, this charge will likely leave a sour taste in your mouth.
But just like deposit fee’s – These charges are easy to find online. More and more brokers are moving away from these kinds of charges but as always, it’s best to check before you commit yourself to any one broker.
How do FX Brokers make money… Inactivity Fee
Inactivity Fees were always my worst kind of ‘stealth’ charge (If they can be called that).
I always enjoyed having the freedom to pick which broker I wanted to trade with. One may have a tighter EURUSD spread, one may offer a certain single stock that I want to trade.
The ability to pick and choose when I wanted specific terms was brilliant to me…until a couple of the brokers started introducing inactivity fee’s!
All of a sudden, my equity was being eaten into with the accounts I used least. I had no intention of closing them or doing anything untoward – I was just trading with a different broker in the meantime.
Because of these fee’s, I closed the accounts with said brokers and stayed with the ones that didn’t have inactivity fee’s.
Now this kind of fee may be harder to find information on. It may be hidden in the terms somewhere so you may be best-off trying to speak to someone about it before you open your account.
This type of fee is charged by certain brokers because having you as a client is extra work and extra cost for them to maintain. These brokers then pass this cost back onto you if you are not trading enough for them to make some profits.
How do FX Brokers make money: Final Thoughts
I hope that this article has shed some light into the mechanics of a retail brokers earning machine and that we’ve answered the question – How Do FX Brokers make money!?
And remember the first 3 points here are common-ground. The final 3 points can be avoided if you do a tiny bit of homework first.
For full details and insight on how to choose your perfect broker, we have written an in-depth article explaining everything you should be looking for. Not just in terms of fees – but everything that goes hand in hand with those fees. You can read it here.
And if you would like to check out our broker reviews, they can be found here – and they cover all of the charges we have discussed in this article!
Also – If you’ve dome some research already and you’re now ready to open your account, please click here!
Good Luck and Happy Trading!