Essentially, forex is the stock market for global currency exchange. You open a trade by purchasing a currency pair or selling a currency pair. You close the trade by selling the same pair or buying the pair. For example, you can exchange U.S. dollars for Japanese Yen by purchasing the USD/JPY pair.
A trade is profitable if the exchange rate is higher when you close the trade or vice versa. Forex brokers are a bridge between individual traders and large financial firms, banks etc. Read on to find out what they do, how to trade forex without one, and if forex is the right investment for you.
What is a Forex Broker?
A broker is a company that facilitates forex transactions. Trading Forex requires access to the trading terminal, so a broker is required. In simple words, a forex broker is an intermediary of the exchange market and they make money from the transaction commissions.
Who Uses Forex Brokers?
Clients include individual traders who speculate currency trends and large financial firms who invest on behalf of banks or other customers. As a retail trader, we cannot think the forex market without the broker. All the forex broker also provides leverage to make more flexibility of each trade which we cannot market without the leverage broker.
What’s in it for the Broker?
The Forex broker receives two forms of compensation: spread and fees. The primary compensation comes from the spread of a currency pair. Regulation has limited the practice of forex brokers making personal trades. Some broker has high leverage and some have low leverage. We always recommend choosing low leverage broker, for example, icmarkets broker.
The spread is the difference between the bid and ask of the currency pair being traded. A trade is opened at the asking price and closed at the bid price, which often results in excess funds after closing. The spread is usually a small fraction of a cent, but for a broker making many large trades, this represents significant profit.
Fees can be charged per month or per transaction. Fees may grant clients access to additional software, trading products, or exotic options.
Ways of Trading Forex Without a Broker
Essentially, there is no way to trade forex without a broker. However, consider what role the broker plays and who can act as a broker. All the retail traders who mark profit use forex broker which is regulated and low spread usually. With this shift in thinking, here are two methods to trade forex without a traditional broker: the non-dealing desk, and alternative currency investments.
1. Non-Dealing Desk (NDD)
The forex market has two order processing types: instant execution and market execution. There are some key differences between the two.
This type guarantees the order will be executed at the agreed-upon price. But, there is no guarantee that the order will be executed.
The trader sends the order to open a trade at the price displayed on the platform. During processing, the price may change. The broker asks if the order should be executed at the new price, or cancelled.
This is the NDD model: the broker delivers a quote based on current prices and transmits the trader’s orders directly to the forex system. These orders don’t go through the broker’s internal system.
There are a few advantages of the NDD model over traditional brokerage. First, orders are executed faster than when you use a broker. Second, the trader is aware of the spread level without the broker’s markup.
2. Currency Investments Without a Broker Account
First, you can buy currency at a bank or exchange office. Hold this currency until the rate has shifted in your favour. Then exchange the currency for cash at a bank. Here the bank is acting as your “broker”.
Second, you can put your faith in a management service. Your manager can invest in ETFs associated with currency markets. They can also buy or sell currency through the bank’s application.
Broker or No Broker? The Advantages and Disadvantages
Advantages of Using a Broker
1. Instant Market Access: The average Forex trade execution is 100ms or less, or 10 trades per second. Brokers have direct access to the market and can execute trades faster than individuals.
2. Diversified Risk: Brokers can combine investment strategies and split funds across swing trading, long-term investments, correlation strategies, and so on.
3. Passive Income: With investment management services, such as copy trading, you don’t need to invest time to grow your cash investment.
4. Financial Leverage: Brokers can offer credit and increase trade volumes. For example, you may receive a 1:10 leverage credit and be allowed to open trades for $1,000 with a $100 deposit.
Disadvantages of Using a Broker:
1. Bad Actors: While less common under current regulations, fraud can still occur. It can be in the form of deposit or price chart manipulations.
2. Leverage-Associated Risk: Using a broker’s leverage can lead to great financial gain, but it can also lead to great loss.
Advantages of Not Using a Broker
1. Full Control: There is little to no risk of fraud when you maintain full control of your investments.
Disadvantages of Not Using a Broker
1. Lack of Tools: Without a broker, a trader does not have access to margin trading, CFD trading, or leverage. The trader is usually limited to just a few currency pairs.
2. Slower Trade Execution: An individual trader does not have the same access to the forex platform as a broker. Trades can take up to 24 hours to complete, during which time the trade may become unfavourable.
3. Large Spread: Some currencies have spread of up to 80%. A currency may be purchased at a much higher price than you can sell it for, even if its value has not changed.
How to trade stocks without a broker
You have two options for trading stock without a broker: becoming licensed, or signing a trade agreement.
This is the slowest and most complicated option. You must have 2-5 years of experience of trading through a licensed broker, a major in finance, and a portfolio with at least four instruments. On average, the investment capital of licensed brokers is at least $100,000 US. You must also have executed at least once per month for a full year.
Sign an Agreement with a Broker
This option is far more convenient. A trading agreement signed with a licensed broker allows you to trade stocks, obligations, and anything else a broker would do. You are essentially operating under their license.
Services such as Robinhood and Stash operate similarly but are available to the general public. You don’t see the full benefits, though, as you are usually paying fees or otherwise sharing your profit with the service.
In short, forex and the stock market are highly regulated investment platforms. While you must use a broker, there are non-traditional options that may suit your needs. For small traders or passive long-term investments, it may be acceptable to forego the traditional broker. However, active or high volume trading is still best suited to the broker model.
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