Forex broker definition

What is a forex broker?

A forex broker is a firm that buys and sells currencies on behalf of retail traders, usually via a forex trading platform. Like stockbrokers, they charge a fee – though usually in the form of a spread instead of commission – in order to execute orders placed by their clients. 

However, unlike stockbrokers, forex brokers will place trades in the OTC market instead of on an exchange.

What does a forex broker do?

A forex broker works on your behalf, by interacting with the global network of banks which comprise the currency market. They’ll offer buy and sell prices for the currency pairs they have available to trade, with their own spread added on. You might be able to buy EUR/USD for 1.3001 or sell it for 1.3000 for instance, giving EUR/USD a 1-point spread.

Currency price movements tend to be relatively small, so forex brokers offer access to leverage. This enables forex traders to get exposure to large amounts of currency without having to commit large amounts of capital. Instead, you only put down a deposit to open your trade.

Leverage amplifies your profits, but will also amplify any losses. It can even mean that your losses exceed the deposit you paid to open the trade. And because your broker has effectively lent you the capital to cover your full exposure, you’ll never actually own any currency – you’re only speculating on the price movements of FX pairs.

Alternatives to forex brokers

Forex brokers offer one way to speculate on currency markets, but there are plenty of alternatives. One of the most popular option is CFD trading.

When you trade a forex CFD, you’re agreeing to exchange the difference in price of a currency pair from when you open your position to when you close it. Your profit or loss is dictated by how far it moves before you close your position.

You buy a pair to go long, and sell to go short. The further it moves in your chosen direction, the more profit you make; the further it moves against you, the more you lose. And as trading CFDs is leveraged, you can amplify your exposure without committing extra capital.

With IG

You can trade CFDs with IG on a huge range of forex pairs.

Find out more about how to trade forex.

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