Forex trading is something that holds the promise of a high return with minimal risk for people who seem to discover how it actually works. It is much different from the normal trade on the commodities and exchange market. One of the things that can confuse potential clients is the bonus and cashback offers that brokers advertise to encourage clients to open an account for trading. Before you leap to take advantage of what appeals to be a winning deal, there are some considerations about becoming involved with a Forex trade of which you should become familiar.
What is Forex?
Forex (FX) is the Foreign Exchange Currency Market. This is where different currencies are exchanged to take advantage of the changing rates between countries. The trading exchange is not centrally located, like the major commodities locations of Wall Street and the Nikkei. It is a market that solely exists and trades via electronic means. Individual brokers and brokerage service are available to access trading on Forex, just as in the regular markets but the way they operate is much different. The foreign exchange is available for trading 24-hours a day, 5 and a half days a week. It is a faster paced trading environment and while it can give high returns, it can also be more volatile. There are many things that influence the value of a currency including public and government sentiment toward economic or political activity and reporting.
The Forex Account
Much like a regular commodities, the Forex account for an individual is pooled with others in a similar group to allow a broker to perform trading on a scale that would be out of reach of the funding of each investor. The Forex broker has a typical leverage rate, in which they “loan” an amount to each of the individual accounts to raise them to the funding level to participate in the transaction. Unlike stocks and bonds brokers, Forex brokers do not make their salary off of a commission. Instead, they use a spread that calculates a percentage in points (PIP) between the selling trade price and bid price for a currency. Once the trading is done, their PIP is deducted from the profit spread and then the PIPs are deposited into the account of the funded investor.
Bonus and cashback offers are used by brokers to encourage first time clients to open an account for trading and as a reward for existing customers. Many of the incentive offers include a no deposit clause, so the investor does not have to put up any cash of their own for the duration of the trade. When the profit of the sale is calculated, the investor can withdraw the profit point’s amount from their account, but not the amount leveraged to them by the broker to take part in the trade. For cash return arrangements, they can function similar to a free transaction, but they also can be used to encourage investors to deposit more funds. For instance, a broker may offer a return of a certain percentage of deposit into a new account to encourage clients to hold multiple funding accounts.
Is it a good value?
Anytime a broker advertises a Forex bonus or other incentive program it pays to check out the terms and conditions thoroughly before you open anything. There are usually many restrictions on the level of deposit that qualifies for a rebate program and incentive programs may only apply to a separate account. It is important to also consider whether the money you have to invest is well placed with the individual broker or group of brokers. Just like with any other business, it pays to check on the reputation and history of the brokers you are going to be doing business with before entering into a contract.
Deposit and No Deposit Bonus Incentives
A popular means of attracting clients and increasing the size of investment from existing ones is to offer a bonus tied to the amount in an open account. These offers are usually restricted to new arrangements. A trader may offer that for every thousand dollars deposited, they will add in 100. This increases the amount of currency you can then trade. However, many of these bonus arrangements have a time restriction. The extra amount may only be credited to the account for a certain number of days or trading cycles. This can work out very well for you, providing your profit from the trades exceeds the bonus amount. Read the terms and conditions carefully to know if the Forex broker will require that the entire amount is returned after the expiration of the time limit regardless of whether profit equally or exceeding it has been made during trading. If the brokers do, and you have not made enough to exceed the bonus amount, you could wind up paying for it out of pocket.