Aspects of regulation, fund safety, and legal issues
It is clear that regulation and compliance are the most important factors to consider when deciding on a broker. Brokers that are unregulated are essentially permitted to do whatever they want with their clients' funds. It is worth being extremely cautious about any unregulated broker due to the possibility that they could be nothing more than an online scam.
Compliance with regulatory requirements
An official regulator should always oversee the activities of a trustworthy broker in order to protect and promote the integrity of brokerage operations. Futures and options traders must be protected against fraud and manipulation, so all abusive practices related to futures and options sales are out of the question. CFTC registration is required for US brokers since they act as both merchants and retail forex dealers. In addition, it should belong to the NFA (National Futures Association). Typically, such credentials can be found on a broker's website in the About Us section. Nearly all countries have equivalents to these trade associations and regulatory bodies. Traders should always research and look at the credentials of their broker, depending on their location. In this respect, it's also worth researching the year when the broker obtained its license as this might carry some significance as well, in regards to the overall reputation and operational history of the broker.
The safety of funds
Brokers who are regulated must comply with a set of rules intended to safeguard investors' assets. This is the primary reason for regulation. There is a requirement that all regulated brokers must comply with the "Net Capital Rule" which prescribes a minimum amount of liquid capital. There will be a 'safety net' to protect investors if a broker were to close down. Regulatory brokers are also required in most jurisdictions to keep client funds separate in segregated accounts so that funds won't be accidentally (or purposely) used for anything other than to execute the client's trades. The United Kingdom even offers government-funded deposit insurance to its regulated brokers so that clients can recover part or all of their funds if the broker misappropriates them.
Types of brokers
One's overall performance and results can be affected by the broker he or she uses.
Brokers with Dealing Desks vs. Brokers with ECNs
Brokers on dealing desks are similar to the dealing desks provided by various financial institutions and banks. Brokers who use a dealing desk and are registered as Retail Foreign Exchange Dealers and Futures Commission Merchants (or the equivalent in another country) can offset trades. In contrast, the No Dealing Desk system automatically offsets positions before transmitting them to the interbank market. Dealing Desk brokers do not interact directly with market liquidity providers, so there is only one liquidity provider in the equation. This creates an inherent conflict of interest.
A broker offering ECN, on the other hand, allows its traders direct access to other market participants via an electronic communications network. Spread-wise, why are ECN brokers preferable to Dealing Desk brokers? Due to the fact that it combines quotations from several trading entities, it can provide much better bid/ask spreads.
As ECN brokers match trades between a variety of traders, they do not have any conflict of interest, as they cannot become the sole market maker, so the broker cannot make trades against its customers. ECN brokers also have the advantage of charging a fixed commission on every transaction because of the lower spreads they offer. However, you should not see ECN brokers as the panacea. Under certain conditions, liquidity of these firms can completely dry up, causing much greater slippages than those experienced by Dealing Desk clients. There is also the sad reality that many brokers refer to themselves as ECNs, but really offer an element of dealing desk service, so are not "true" ECNs.
Commissions & Fees
The third and most important factor in brokerage selection is cost.
Brokerage fees - not everything is about price
Brokerage fees are fees that brokers charge for the services they provide. Brokerage services typically involve facilitating the transactions between buyers and sellers. Retail traders, the situation can best be summarized by stating that Dealing Desk Brokers charge only spreads, while ECN Brokers also charge commissions.
Commissions & Spreads (Fixed or Non-Fixed)
The key difference between fees and commissions that all traders need to understand, is that fees represent a flat charge, while commissions vary depending on the delivered financial product and the size of the transaction.
Is the broker offering premium services?
Most full service brokers offer a wide range of additional perks and premium features, some of which can be quite valuable. Of course, they aren't free. In this regard, you need to look for a broker who offers as many premium services as possible, at a low price. Among our premium services, we offer advice and research that covers a variety of traded assets, tax planning, retirement planning, etc. If you want to take advantage of these services, you have to carefully consider them. You don't need the intricacies of premium services if you are only looking to execute trades. Discounts are probably your best bet.
Rollovers are credited or debited by the broker?
Rollovers on a daily basis are also important to consider. Depending on the relative interest rates of the currencies involved in the trade, a daily rollover is interest credited or debited to an entity holding a Forex position overnight. If a position remains open past 5pm EST, it is considered held overnight. As a result, the broker will consider which national currency the trader bought in relation to the other national currency in the pair. Rollover interest will be credited if the interest rate difference favors the bought currency: theoretically, at least. The interest is debited if it is the other way around. The problem is that most brokers make sure their clients pay for holding most positions overnight, and there is nothing stopping them from doing this beyond the true cost of the market. The majority of brokers automatically roll over open positions. You should be aware that rollover interest is calculated on the entire amount involved in the trade, not just the margin. As with the capital gains, the rollover interest represents a separate source of income and should be taxed separately as interest income.
A glossary of trading terms
We'd like to explain some of the terms and expressions you may have encountered within this guide but weren't fully explained.
Margin accounts allow investors to borrow money from brokers with the intention of controlling larger positions than they would be able to control using their own capital alone. Trading on margin is possible through specific margin accounts. Margin percentages for accounts with 100,000 currency units are set to 1-2%. In other words, a trader needs to deposit $1,000 to take control of a $100,000 position. There are special operating procedures intended to reduce the risks associated with margin accounts, both for the trader and for the broker.
Margin is different from leverage. Consider a broker who requires a $1,000 deposit to make trades worth up to $100,000. Leverage means multiplying the deposit by the maximum trade value to reach the maximum trade value: in this case, 100, so the leverage is 100 to 1. Margin is simply the deposit amount multiplied by the trade value maximum. 1% is the margin here. Just reverse the earlier calculation.
Deposit / Maximum Trade Value = Leverage
"Margin" is often used colloquially to refer to the money deposited with a broker.
A trader's initial deposit is the first deposit he or she makes with a broker. This deposit may be rewarded in some way, such as a bonus.
Bonuses & Promotions
The broker uses bonuses and promotions to "sweeten" its offer and attract more business. It may be worth considering whether a truly top-quality broker would see the benefit in offering such incentives.
Investors, whether they are new traders or experienced investors, should pay close attention to customer service. A customer service agent is responsible for resolving any problems one may have with his or her broker. A broker's expertise, skills and availability should therefore be considered when selecting a broker.
It usually takes some time for third party checks to clear before they can be deposited into trading accounts. Upon clearing, the checks become "available". The availability of checks is determined by the bank from which they originated, and the availability schedule of the broker.
Retail traders interact with markets through the trading platform. The trading platform is also the tool traders use to trade. For trading to be successful, a proper trading platform must be simple, fast, and easy to use.
Ease of Deposit & Withdrawal
Making deposits and withdrawing money from your broker quickly and easily is very important. How your broker handles withdrawals and deposits will depend on the type of option you choose. Payment solutions need to be as diverse and as wide as possible. In addition, you should check the withdrawal time, as many traders complain that they cannot withdraw funds for a week, when they wanted them sooner.
Traders must maintain a minimum balance in their account in order to be able to maintain the account open and receive the services they have signed up for. There is no doubt that a smaller amount means more profits for the trader.
Any asset that is the basis for a derivative is an instrument in the context of foreign exchange trading. Trading instruments include commodities, stocks, indices, and currency pairs since they hold and/or transfer value.