Taking your first step into the forex market is always a challenge in itself. Understanding the functioning of the market and getting a grasp of the trading concept and technicalities surely take some time. But one crucial decision that you have to make as a beginner is choosing the right forex broker. This decision will have a major influence on your trading journey and experience as a whole. So, you need to consider several options and variables before opening a trading account with a forex broker. Today, you will be able to educate yourself about forex brokers and the role they play in trading by reading this beginner’s guide.
What Is a Forex Broker?
We do hear the term forex broker a lot while trying to explore the forex space. But many of us may not have a clear idea about what it actually means and why they are important for trading with satisfaction. So, this is a basic question that needs to be answered before moving forward. In simple words, a forex broker is an intermediary between the forex trader and the forex market. You cannot access the forex market without opening a forex trading account with a forex broker of your choice.
But the forex broker is much more than a middleman in the trading process. They will be functioning as a connecting link between liquidity providers and retail traders which is essential for a smooth trading experience. They will be working in the background to make the currency pairs available for trading at best prices. They will also be charging a fee for this service in the form of spreads and commission. The forex broker integrates a popular trading platform to their website, enabling the users to trade directly through the broker platform.
The forex broker is also in-charge of handling your funds or trading capital. You will be placing trades through the trading account registered with the forex broker. Hence, you will be trusting them with your hard earned money. So, this sums up the relevance of finding a reliable forex broker as the trust factor is very much needed to engage in trading activity.
Regulated Vs Unregulated Forex Brokers
Now another term that we often hear in relation to forex brokers is regulation. There are basically two types of forex brokers: regulated and unregulated. Regulated brokers are the ones who are registered with a regulatory body with a valid licence to function as a forex broker. The regulated body will be keeping an eye on the broker to ensure that they are operating within the legal boundaries. They also have to meet the criteria set by the regulatory bodies for earning and maintaining the licence throughout. That is why many traders tend to look for regulated brokers to carry out their trading activities as they are safer in comparison.
On the other hand, an unregulated or offshore forex broker is not regulated by any such authority or regulator body. They are independent and are not answerable or obliged to meet the requirements set by forex regulatory bodies. But this does not mean that they are illegal or cannot be trusted. Many forex traders prefer to trade with offshore brokers as they tend to be more flexible in some aspects. But for a beginner with no prior knowledge or experience in the forex market, opting for a regulated broker would be more ideal in our opinion. However, you are free to choose any broker that suits you as a trader and can proceed after ensuring that they are legit irrespective of the regulatory status.
Advantages Of Regulated Forex Brokers
- They are constantly monitored by the regulatory bodies that they registered with, which makes them more trustworthy.
- You are more likely to get negative balance protection with regulated brokers.
- Regulated forex brokers’ platforms may have better functionality along with a responsive customer support team. Offshore brokers may also provide this but when it comes to regulated brokers, they are obliged to meet the standards set by the regulatory body.
- Choosing a regulated forex broker is a good practice to trade on the safer side.
- The regulatory bodies will be there to protect the interests of clients who are trading with a forex broker regulated by them.
- Regulated forex brokers usually have a wider clientbase and tend to be more popular which often makes them better when it comes to customer service.
Disadvantages of Regulated Forex Brokers
- Some regulated brokers will limit leverage offered to retail traders.
- Trading with a regulated forex broker does not make trading 100% safe even though the regulatory status adds to the trust element.
Which Are Popular Regulatory Bodies?
There are quite a few top tier regulatory bodies that regulate forex brokers and trading with any broker who is registered with these well-known authorities will give traders a sense of security. Some brokers may state that they are regulated but often they are only partnered with lesser known authorities which does not add much value to the regulatory status. So, it is important that the regulated forex broker you choose is registered with a tier-1 regulatory authority in the first place
Now, let’s have a look at the top tier regulatory bodies that you should know about while choosing a regulated forex broker.
FCA or Financial Conduct Authority is a top-tier regulatory body for UK forex brokers. So, traders who reside in the UK can look for a FCA regulated broker as it makes them a licensed forex broker in the United Kingdom. FCA can be rightfully referred to as the number one regulatory body due to the high standards set by them.
CySEC is the short form for Cyprus Securities and Exchange Commission which is the top most regulator for the EU and Cyprus region. The functions of CySEC are very much similar to FCA and this makes CySEC regulation relevant for forex brokers offering services in the EU.
ASIC stands for Australian Securities and Investment Commission. As the name implies, this regulatory body is in charge of giving licence to forex brokers offering their services in Australia. ASIC has a key role to play in the forex industry as many of the global forex brokers are based in Australia.
FSCA or Financial Sector Conductor Authority is the top regulatory body that grants licence to forex brokers offering their services in South Africa. There are many forex traders located in South Africa and they can look for a FSCA regulated forex brokers for a better trading experience.
There are some more regulatory bodies that regulate the activity of forex brokers operating in different regions. We have only covered the top 4 authorities as these are the most common regulations obtained by forex brokers on a global level. To sum it up, I want to say that regulatory status is an important criteria that one must consider while choosing a forex broker. Beginners need to do some research in this topic as it can help them in making a wise choice when it comes to selecting the most ideal forex broker.