How do brokers earn money?
It is sometimes surprising how brokers can make money when you consider that they often do not charge commissions at all. How on earth can they make a profit? In this article we look at how brokers actually make money from the investments that you make with them.
CFD brokers usually do not charge a commission on opening positions. They achieve the greatest profit by calculating a spread. The spread is the difference between the buy and sell price, usually these prices are the same.
However, for a buying position brokers charge a higher price and for a sales position a lower price. For example, if the spread on a lot GBP/USD is 1 pip, the broker already earns 10 US dollars immediately on this transaction. Read more about the spread in the article about transaction costs.
Brokers also do hedges, whereby they settle positions internally. In this way there are actually no risks for the broker (they do not lose money on the position) while no transaction costs have to be paid. You can read more about the hedging of positions in the article on how brokers hedge their positions.
Looking for a broker? Take a look at our overview of the best brokers!
Other income from the assets
Moreover, the assets you deposit with the broker also generate money. The money will, of course, be kept in a bank account and the broker will receive a certain interest on the total capital. In addition, dividends are regularly received on shares and, depending on the broker’s policy, it will pay this dividend or retain it itself. Nowadays, most brokers simply pay the dividend to the customer.
Did you know that brokers may use a certain percentage of the assets to buy and sell securities themselves? Brokers will therefore be happy to buy liquid stocks like Apple and Google, as these are easy to ultimately sell. These shares can then be allocated to customers who occasionally order some shares. That way they do not have to go to the market for every small transaction.
Brokers earn real money!
So don’t worry about the brokers; they really know how to make money. Do not feel guilty if a broker promises you free money, they ultimately get it back. They can earn thousands and thousands of pounds from a customer in the long term and that is why they are only too happy to promote customer loyalty. Make the most of it!