Home / Course / Module 1 / Brokers and How They Make Money
Module 1 · Lesson 5 of 6Retail traders reach the market through a broker. Knowing how brokers earn money helps you understand your costs and spot where interests may differ from yours.
Risk warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Educational content only. Nothing here is a recommendation, and no result is guaranteed.
A broker is a firm that gives you access to a market. As a retail trader you generally cannot connect directly to the interbank market or an exchange, so the broker acts as your gateway. It provides a trading platform, quotes prices, executes your orders and holds your account.
Two terms to separate:
Think of a broker as a travel agent: you do not buy the flight from the airline directly, you go through someone who can access the system and charges for it, in one form or another.
Brokers are businesses, and the money has to come from somewhere. The main sources are:
| Source | How it works | Who pays |
|---|---|---|
| Spread | Broker quotes a slightly worse price to you than the market price and keeps the difference | You, on every trade |
| Commission | A fixed or percentage fee per trade | You, on every trade |
| Financing or swap fees | Charges for holding leveraged positions overnight | You, while a position is open |
| Other fees | Withdrawal, inactivity or currency conversion charges | You, in specific cases |
| Trading against clients | Market maker keeps client losses when it takes the other side | Clients as a group, if they lose overall |
The tidy way to look at it: a broker earns from your activity through spreads, commission and financing, and in some models also from your losses. Always read the fee schedule before depositing.
Brokers broadly fall into two models, and some use a mix.
Neither is automatically honest or dishonest. Regulation, transparency and the firm's record matter more than the label.
Ask how your broker makes money and what happens to your order. A trustworthy broker answers clearly. Vague answers, or promises of guaranteed outcomes, are warning signs.
Costs look small per trade but matter once you trade often. Here is how to calculate a simple round-trip cost.
Hypothetical example. You trade 1 ounce of an asset quoted at bid $2,000.00 and ask $2,000.50, and the broker charges a hypothetical $2 commission each way.
The price must move at least $4.50 in your favour before you break even. If you do this 10 times, the cost is $45 before any market movement. Fees on larger positions scale up proportionally.
Add overnight financing if you hold a position over several days. You will meet this in the derivatives and forex modules. For leveraged trading generally, see gold trading risk management.
The price you click is not always the price you get. Slippage is the difference between the expected price and the actual fill price. It happens most in fast markets. It can sometimes work in your favour, and often does not. A requote is when the broker offers a new price after you submit an order.
Execution quality is hard to judge from marketing. Look for clear order-execution policies, reasonable and transparent spreads in busy and quiet times, and reviews from many sources over a long period.
Before depositing, check these basics. Regulation rules change, so check the regulator's own website and register rather than relying on a broker's claims.
Be wary of unregulated firms, pressure to deposit quickly, bonuses with hard conditions and promises of returns. A later lesson in the course covers choosing a regulated broker in more detail. Also revisit Who Moves Markets? to see where brokers sit among the players.
Common errors include choosing a broker on the headline bonus alone, ignoring withdrawal terms, and confusing a tight advertised spread with low total cost once commission and financing are added. Another is trusting a claimed licence without checking it on the regulator's register, since imitation of real firms is a known problem. A final mistake is depositing a large sum first. A sensible first step is a small amount, a test withdrawal and reading the terms carefully.
Not necessarily. Many regulated firms use this model. What matters is regulation, transparent costs and how the firm treats clients.
Both are ways to charge for the service. Some firms build the fee into a wider spread and others show a tight spread and add commission.
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