Introduction

Forex trading is a very lucrative form of trading that involves currency trading. Banks, companies, hedge funds, investment management institutions and individuals traders worldwide are all involved in forex trading. Forex trading is available twenty-four hours a day from Monday through Friday. Forex brokers are part of this very exciting field. How do forex brokers make money? Are there commissions paid to forex brokers? The following article is a discussion of how forex brokers make money.

» Forex Brokers and Payment
It is important to understand that many forex brokers do not actually charge a commission fee. Rather, forex brokers are paid as a result of the forex traders' activities. There are sellers and there are buyers in the forex market. The way it works is that the forex broker functions as a middleman in the forex process.

» Examples of How Forex Brokers Get Paid
Imagine for a moment a situation where there are three people in a transaction. Imagine also that the sale and purchase of baseballs will be involved in the transaction. This is just a hypothetical example. The first person is a seller. The second person is a buyer. The third person is the middleman or the person who is in between the seller and the buyer. Imagine that the seller contacts that middle man and asks how much money the middle man is willing to pay for a baseball. The middle man says he will pay two dollars for a baseball. So the middle man goes ahead and pays the two dollars and purchases the baseball. Then lets say that you contact the middleman and ask him how much you have to pay in order to buy a baseball. The middleman says that you have to pay three dollars to buy the baseball that he just purchased from the seller. In this example, because the middleman purchased the baseball at two dollars and then sold the baseball at three dollars, the middleman has made one dollar profit.

If the same ideas are applied to forex, you might have a hypothetical situation where there are three people. The first person is a person who wants to sell. The second person is a person who wants to buy. The third person is the middleman who is between the seller and the buyer. In this example, lets say that the seller is willing to sell to the middle man at $1.0000. The middle man buys from the seller at $1.0000. But then the middle man sells at $1.0005 to the person who wants to buy. The difference between $1.0000 and $1.0005 is .0005.

Each increment of .0001 is called one pip. So .0005 equals 5 pips. This .0005 or 5 pips is the spread. The spread is where the forex broker makes his or her money because the forex broker functions like a middleman. In other words, the forex broker takes orders from various buyers and sellers in the market and that is how the forex broker makes money.