The Different Types of Forex Brokers
There are a number of different types of forex brokers out there that you should be aware of. The different brokers do represent different levels of access to the market. With this being the case there are certain brokers that new traders should stay away from. It is very important that you know about the different types so you can find the best one for you.
The Bucket Shop
The name alone may make you wary of this kind of forex broker and you should be if you are a new trader. The bucket shop has very little connection to the actual forex market. The bucket shop works with options and future as opposed to spot trades which make up the forex market. The way this broker works is that they will essentially bet against the trader. The position they take is the opposite of what you are actually doing or what a retail trader is doing. These positions will not be taken out on the market.
Online Retail Forex Brokers
Retail forex brokers are the types that most online forex brokers will fall under. Each of these brokers will differ from another as they offer a wide range of services and features. Most forex traders will use retail forex brokers of their forex trading needs. These brokers are connected to the forex market. The manner of their connection may be direct or indirect.
It should be noted that these are the best forex brokers for new traders to use. They are also the most easily found. Opening accounts with these brokers will be free and depositing money easy. Using these brokers is legal in most countries so you do not have to worry about this as with book makers.
The book makers and the bucket shop have a very similar base. The book maker will not make profits from the actual trade on the forex market. The broker makes their money on the spread of the trade which is the difference between the buying and selling prices. This broker is like the buck shop in the respect that it actually has very little to do the actual forex market. Book makers are also known as spread betters. It is important to note that these brokers are illegal in certain countries like the USA.
These brokers are generally 1 of the 200 banks that are part of a consortium with a direct connection t the forex market. This is the way that more than half of the forex trades are done. However, they are not actually good for new traders as only banks can use these brokers.
Institutional Market Makers
These brokers are the most closely aligned with the forex market and they have a more direct connection to the market than most retail brokers. These brokers are suitable for new traders to use. However, one problem a new trader may have is the large amount of capital these brokers require. This is the reason why most new traders should look at retail brokers instead.