Currency exchange is trendy. Traders work in the largest financial market. You can make money with any device – even a smartphone! In 2021, the opportunities for financial freedom are spectacular. However, if you choose the wrong intermediary, prepare for a mistake. Some forex brokers in South Africa are shady to say the least. Learn to spot the typical red flags so your money is safe.
What does a broker do?
Forex is a gigantic global market, but it has no physical center. All operations are electronic so buyers and sellers connect online. Your interaction takes place through digital environments such as MetaTrader 5. You cannot use the software without official access. To get it one has to register with a broker.
A broker is essentially the middleman between you and the global marketplace. It must not be bypassed. The company offers a range of services:
- registers demo accounts for training purposes;
- registers live accounts for real money trading;
- offers software (including proprietary solutions);
- provides support through various communication channels (e.g. email and telephone);
- offers a variety of educational content, from articles to webinars;
- processes all financial transactions;
- arranged Forex trading Competitions etc.
Where is it licensed?
The lack of a license is a telling sign. Legitimate businesses can be registered in a variety of jurisdictions. For example the Forextime The broker has official approval from reputable companies such as the FCA (FSA) in the UK, the FSCA in South Africa and the CySEC in Cyprus. Information on Forex trading website confirms compliance with industry standards. Of course, an FSCA license is particularly important for credibility in South Africa.
Licensed brokers offer negative balance protection. This means that when a customer makes a loss, their size will never exceed their current balance. If your strategy is hopelessly wrong, you will never be in the red. Your money is kept segregated from company capital and you may be eligible for compensation if the company goes under.
Any unlicensed broker is a scam. They can try to lure you in with generous welcome offers (e.g. unrealistic sign-up bonuses for no deposit trading). Remember that a website with an elaborate design can be created in a week. Reputation, on the other hand, takes years to build.
ECN or Market Maker?
These are two existing broker models. Companies classified as market makers make the market. This means that their own exchange rates will differ from actual market quotes as the cost is included. This difference is insignificant as strong competition forces all players to offer tight spreads.
ECNs or electronic communication networks charge a commission per trade. Your customers see streaming offers directly from the market. While market makers are their own liquidity providers, ECNs are not. This means that your profit will not be paid out of the company’s funds. ECNs connect you with other liquidity providers and receive commissions regardless of your results.
In theory, market makers have the ability to manipulate their pricing. In addition, their interests conflict with those of the dealers. In reality, market makers can be absolutely reliable providers. Reputable big brands like FXTM offer both types of accounts. So you can decide how you want to structure your costs – whether you pay a commission or agree to a slightly different ask and bid.
Avoid Forex Scammers
Unfortunately, because Forex is so popular, scammers use inexperienced traders. Investigate your prospect’s website. Do you see any of the red flags listed below?
- no physical address;
- no phone number (or nonexistent);
- no license details (license number and issuing organization);
- no demo accounts;
- Promoting Forex as a Way to Get Rich Quick;
- No mention of trading risks.
Reliable brokers offer ample educational resources and demos are essential. These accounts unlock the software as a simulator so that users can practice for free. Demo trading is usually free and unlimited. Any company that encourages you to fund a live account right away is in doubt.
Check the real feedback
Visit review sites to see how experts rate the broker. Check for customer feedback in online communities or forums. Rate it critically: 5-star reviews can be fake, especially if they all look similar and have no details. Since fraud is common, do your homework well.
The bottom line
In summary, a trusted broker is an officially licensed financial services provider. In South Africa brokers are licensed by the FSCA. The largest companies serve millions of customers worldwide. They have impressive collections of industry awards and high ratings on review platforms. Choosing a broker is the main step for any novice to Forex. Follow our tips to find a company to help you build a trading career.