4 major types of Forex brokers are distinguished: market operators, market makers, small brokers and kitchens. Let’s examine them. The criteria of their difference are the total turnover they make, the amount of transaction and the sum of bills.
- Market operators
This is the most trustworthy group which consists of big commercial banks controlled by bank laws and rules. But in order to trade with such banks it is necessary to have bills for trading currencies for large sums of money. For example, the minimal lot is supposed to be about $1 000 000.
- Market makers
Market makers are financial enterprises working with smaller broker companies and providing hypothetical prospects of Forex trading to dealers whose trading capitals is more than $50,000. Their advantage is that they offer lower cost of Forex market trading and as a rule have more trustworthy financial support. However, the minimal size of the bill for $50,000 keeps them off from the main Forex market traders.
- Small brokers
These are little broker’s enterprises working with individuals’ small capital which can vary from hundreds up to several thousand dollars. If the client’s market inquiry or the deal is successful, the client gains gross profit from Forex market trading with the deduction of spreads and commission fee. The broker company also gets its own profit on Forex deal with their market-maker which is the same as net profit that they will pay to the client in addition to their own commission and, maybe, little spread. The one who lost in this deal is the market-maker which has made money, but has lost profit gross from the deal on the whole (the gross profit is received by the broker company).
It’s important to remember that some broker companies present bigger spreads to their clients than they receive from a market-maker themselves, and that’s one more way of getting benefit in addition to their commission. Definitely, they’ll never confess it. The spread can be twice as big. Of course, if the client’s case fails, the broker company suffers big loss from the client’s bill and will have to pay a market-maker the pure loss after drawing on its broker expenses and commission fee. Anyway, the broker company still receives the commission and a little spread.
- Kitchens
The scheme of “kitchen” is a fraudulent plan existing in forex market. The scheme usually works the following way. There appears a company offering people to teach them the intricacies of Forex market trading (note, for free!).
“Trainers” convince that this is the quick path to riches and that making unbelievable profit is very easy. These “trainers” are actually either non-professional Forex market traders or even the people who have never traded in Forex market by themselves. After just a couple of hours the “training” is over. Sometimes the clients are trained by means of computer “simulators” where any trader is “getting profit” approximately 1000 % a week. The major part of these “students” bear losses from the very beginning, and each time they’re confident that was a good lesson which will improve and hone their trading techniques. Most of these clients’ deposits end quickly and they go away from the market, while more obstinate ones “put in” more money to their bills to get one more chance and finally to make profit. They behave like gamblers and reckless players in this case. At last they suffer great losses (lose all they have, in fact). It’s the moment of triumph for these companies since this is exactly what these companies are devised for. They earn on people’s losses of such transactions, and many firms besides profit from spreads or commission fees which they require for them.
The scheme of “kitchen” works if some market trader doesn’t start to win all the time. Their founders know that many clients simply lose their money. And the income of “kitchen” is these clients’ losses. Then “kitchen” is closed with the remainder of clients’ money and appear under another name in a couple of months. Thus, a novice trader wishing to enter the forex market needs to be very careful and even cautious in order not to be hooked by the “kitchen”.
Before starting actually to trade on Forex, it is very important to learn how to do this. Since Forex offers a lot of opportunities to profit, sometimes there is a temptation to get down to it as soon as possible. However, it’s better to slow down and to invest some time and efforts (sometimes it may take quite a substantial period of time) in becoming proficient in the concepts and terms of Forex, getting the hang of Forex trading techniques and accumulating information about this market. One should remember that trading on Forex can be a rather risky business, since your own money is at stake. Sometimes it can be a reasonable decision to hire a professional forex broker who will guide the fresh trader through the details and subtleties of the forex trading process.
