A Brokerage Firm (or Broker) is a firm that acts as a middleman between buyers and sellers in order to facilitate a financial transaction.
Brokers typically receive a compensation by means of a commission (also known as spread) once the transaction is completed. The spread is the different between the bid price and the ask price of an instrument.
In the financial markets, there are different types of brokers offering a wide range of services. Some brokers have very low and competitive spread while others have fast execution time and real-time news feed.
Thus, choosing the right brokerage firm can be a difficult task, especially for beginners.
In this article, I will discuss the important things to look for when choosing a forex broker to help you make the right decision.
The first thing is to check whether the broker is licensed and what is the country who issued the license.
It is not hard to verify the credentials of a retail brokerage firm. There are regulatory agencies all over the world that keep an eye on fraudulent companies.
Here’s a list of the main regulatory authorities:
Australia: Australian Securities and Investment Commission (ASIC)
Switzerland: Swiss Federal Banking Commission (SFBC)
Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
France: Autorité des Marchés Financiers (AMF)
Canada: Investment Information Regulatory Organization of Canada (IIROC)
For example, in the United States, intermediary companies must be registered with the Futures Commission Merchant and with the Futures Trading Commission, the CFTC, and a member of the National Futures Association (NFA).
The NFA and CFTC agencies are designed to protect consumers from fraud, manipulation, and illegal business practices.
You can check the date of any brokerage firm at the CFTC or NFA websites or by calling the Broker firm information section at (001-621-3570). You also can visit this link for more information: www.nfa.futures.org/basicnet
The number one priority should be ensuring the safety of your funds. This means making sure that your broker will not steal your deposit.
You need to make sure that even if the broker operates honestly, but goes bankrupt for any reason, that you will be able to recover your deposit. One measure that can be taken here is to only deposit with brokers whose regulators offer deposit protection for clients such as regulated brokers in the UK or Australia.
This means that the government will bail you out by paying back your funds up to a certain amount.
The currency market doesn’t sleep, and having a reliable customer service that you could easily contact when problems arise is a must.
When you choose a broker, ask yourself this question: Can I contact my broker by telephone, email, online customer service chat, and others?
The quality of customer service varies from one firm to another. In order to verify whether the broker has a reliable customer service, try to call their technical support and see for yourself.
If you do not have a quick or convincing response to your questions, know that it is a broker you should avoid.
As mentioned earlier, the spread is the difference between the bid price and the ask price. You must carefully check the spread on your broker’s website before opening an account.
For example, the spread on EUR/USD ranges from 0.1 – 3 pips across many retail brokers. So you should be careful not to choose a broker that charges high spreads for the pairs you want to trade.
Transaction costs are inevitable. Every single time you open a trade, you need to pay for the spread and or a commission depending on the type of account you have with your broker.
Make sure to select the right type of trading account based on your trading style. For example, if you choose to open a tight spread account, your broker will charge you fixed commissions with every trade you place, which will hurt your trading performance if you are a scalper.
The goal here is to find the right balance between your trading style and transaction costs.
Deposits and Withdraws
Good forex brokers will allow you to deposit and withdraw your money without problems or delays.
Check their conditions on their site before you sign up for a trading account. If their conditions are not clear or you don’t like it, choose another one that is hassle-free.
Brokers only hold money to facilitate trading, so you need to be able to withdraw anytime you want.
Good brokers make sure that the withdrawal process is quick and smooth in order to attract more clients.