Module 1: How brokers work · Lesson 1 of 11

What a forex broker does

3 min read

A forex broker is the firm that connects you to the currency market. It shows you live prices, takes your orders, holds your deposit as margin and charges you for the service through spreads, commissions or a mix of the two.

Why you need a broker

The foreign exchange market is made up of banks, funds and other large institutions dealing directly with each other in huge sizes. A private trader cannot simply phone a bank and ask to buy 1,000 euros against the dollar at the institutional rate. A broker bundles access for you: it sources prices, lets you trade small sizes such as a micro lot (1,000 units) and handles the settlement in the background.

What the broker provides

Prices: a bid (the price you sell at) and an ask (the price you buy at) for each currency pair.
A platform: software on desktop, web or mobile where you place and manage orders.
Leverage: the ability to control a position larger than your deposit. With 1:100 leverage, you only need 1% of the position value as margin.
Custody of funds: your deposit sits with the broker while you trade.
Reporting: statements showing every trade, fee and overnight charge.

How brokers earn money

Brokers are businesses, so every service has a price. The most common sources of income are:

The spread – the gap between the bid and ask prices.
Commission – a fixed charge per lot traded, common on raw-spread accounts.
Swap – overnight financing on positions held past the daily rollover.

Example: Suppose EUR/USD is quoted at 1.1000 bid and 1.1002 ask. The spread is 2 pips. If you buy one standard lot (100,000 units) and immediately close it, you lose about $20, because one pip on a standard EUR/USD lot is worth roughly $10. That $20 is the cost of entering and leaving the trade.

Understanding these income streams matters because they come straight out of your results. Two traders with identical strategies can end up with very different outcomes simply because one pays far more in costs.

Risk: Leverage magnifies losses as well as gains. A broker making it easy to open large positions does not make those positions any safer.

Key takeaways

A broker gives retail traders access to currency prices, a platform, leverage and custody of funds.
Brokers earn mainly from spreads, commissions and overnight swaps.
One pip on a standard EUR/USD lot is worth about $10, so even small spreads add up.
Your trading costs directly reduce your results, so they deserve close attention.

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Educational content only — not investment advice. Leveraged trading carries a high risk of loss.