If you have been looking to get into the foreign currency trading exchange market, you may have run across advertisements offering “free Forex accounts.” These are offers from a broker agency to allow you to trade on the market without depositing any funds up front. Are these offers real? And if they are, how can this possibly be good business? These are real offers and they represent some astute business practices on the part of a broker. However, just because a trader or agency offers a no deposit offer does not mean they are the best choice for you.
The Free Offer
Forex brokers do not make their profit off of commissions like brokers working the regular commodities trading exchanges. They earn based upon the spread between the asking and bid price in currency exchange. This spread of “pips,” or percentage in points, is what allows the broker to offer to take you on for no funds up front. A Forex broker combines the monies invested in their service and uses them to provide leverage to each holder for block purchases and sales of currency. In essence, the trader is offering you the leverage without the guaranteeing deposit. Then, based on the spread of the exchange, both of you earn your share of pips.
What is the catch?
There really isn’t a catch to this type of arrangement for the investor as you have put no cash up for the trade. The Forex broker assumes all the risk of the trading investment. There are limitations to this kind of deal. You cannot withdraw the amount that they leveraged your unfunded account for the exchange and there is typically a set amount of trading points you have to acquire before you can withdraw the profit on a trade. This insures that the brokers risk is minimized. Once you have reached the maximum trading points detailed in the offer, a deposit is required to actualize your account and continue on. These special no deposit accounts are not meant to be continuously played into more and more trades, but to serve as an introduction to the trading market and the brokers.
Why is it offered?
Forex brokers offer these no deposit accounts as incentives for new customers or as a bonus to existing ones. This allows them to prove the validity of using their services in a market that many people do not understand. The Foreign exchange market is not like the stock market. It runs 24 hours a day, across time zones and markets and in the end, you aren’t really trading anything tangible – only an implied value.
The Implied Value of Currency
A Forex broker is less of a manager of value than an interpreter of implied value. In reading the currency markets, one has to take into consideration certain intangibles that would not affect the value of such stocks as research and development holdings in a technological concern. One of the most important intangibles is the perception of political and economic climate. Based upon sentiment about government decisions and policies, a currency may rise or fall in value. There are other determining factors about the value of currency such as debt limits, natural disasters, natural resources, economic forecasts, budgets and global relationships.
Once you have experienced success with a no deposit deal, the Forex trader encourages you to use the profit points as a part of creating an official arrangement. At the end of the bonus term, the options are to withdraw or roll the profit into an arrangement. The new account is not considered to be active until a deposit is made raising it to the minimum level to open the service. The minimum amount can vary from service to service. When you are looking at whether or not to stay with the trader, make sure you understand how they leverage their Forex accounts and the spread that they use to determine the pip. This will often be different from the special offer rates that you just participated in for free. Don’t let yourself be a victim of a low rate bait and switch. While there are few unscrupulous brokers, encountering one can be one too many for your accounts. Check out the possible agents thoroughly, and then look for special offers that allow you to test drive their service before committing your money to anyone.
Incentive programs are one of the best ways to learn about whether this kind of investment and risk scenario is right for you. Use caution and make sure that you understand the terms and conditions of any agreement before entering into a contract. Make sure to research the history and reputation of anyone offering this kind of program as well. It pays to treat it as if it your actual savings were at risk to insure that you do not create a future risk.