The crucial role of the trading broker is to receive and transmit orders from investors. A professional trader or an individual transmits to his broker a buy or sell order which the latter executes.
Its objective is always to facilitate exchanges between the two parties by trying to obtain the best prices on a securities or a currency. Therefore, it offers a gateway to the market and presents itself as an essential intermediary in the processing of transactions. It is indeed, today, almost impossible to buy or sell financial securities without its intervention.
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It should be noted that the trading broker also takes care of the clearing of orders. These are payments between the buyer’s account and the seller’s account, as well as the delivery of financial products if necessary.
How does a trading broker get paid?
Commission or brokerage fees
The trading broker may apply a percentage commission for each of the transactions carried out by traders. The amount varies depending on the percentage of the minimum threshold, capital invested, and the maximum commission.
For instance, the general conditions of the trading broker may provide for a commission of 0.10% levied on each transaction, with a minimum of 5 euros.
Generally, the commission only applies to share CFDs. Indices, currencies and commodities are in principle not affected.
To choose the brokerage with the most suitable fees it’s advisable to check out the brokerage reviews such as CTL Markets Review.
The spread, or the price difference
The trading broker can also be remunerated on the difference between the purchase price of a security and its selling price, also called the spread. This is calculated as a margin paid automatically by the trader when closing the position.
In general, there are two types of spread: the fixed spread and the variable spread. The first one corresponds to an amount determined and which will not depend on the margin made during the operation. This type of remuneration enables the investor with some security and avoids unpleasant surprises when closing the position. The variable spread varies according to the movements on the market.
Three main variables determine the amount of broker trading commission:
The level of market liquidity: the higher the levels, the more the spread decreases.
Political, economic and geopolitical events: the higher the risks in a country concerned, the more brokers increase their commission on securities linked to this country in order to protect themselves against uncertainties.
The volatility of a security over time: the more security tends to show strong variations, the higher the broker trading spread will be.
How to choose the right trading broker?
To choose the right trading broker, it is necessary to follow certain essential steps.
First of all, before embarking on the online trading activity, make sure that your broker is well regulated by an authority. For this, you can consult the Register of Financial Agents (REGAFI). In order to secure your funds, it is also better to contact online brokers present in countries where the regulations are rather favourable to investors.
Then consult the comparisons between brokers, which give an interesting overview of reliability, but also on the responsiveness of customer service or on the functionalities of the site.
After selecting a few trading brokers, it’s time to test them. For this, it is important to open a demo account in order to get a more precise picture of how it works. These accounts can be used, most of the time, in an unlimited way, allowing you to take no risk to train.