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.