Your brokerage firm is the company that facilitates the transaction between the buyer and seller through a stock or futures exchange. It usually takes a commission for its service. However, the spot forex market doesn’t have a central exchange to match orders, so your brokerage firm may make its money on the spread — the difference between the bid price and the ask price of the market you’re trading.
For example, if the bid for EUR/USD is 1.4185 and the ask is 1.4188, that means buyers are willing to buy at 1.4185, and sellers are willing to sell at 1.4188. Thus, there’s a three-pip spread between the bid and ask. (A pip is the smallest move that a forex pair can make.) Those three pips are the profit made by the broker (and any other liquidity providers involved in the trade).
Brokerage firms typically supply other services to their clients, such as education, news feeds, advice, and recommendations. Generally, the more services a broker provides, the higher the commissions you’ll pay. These full-service brokers provide value by supplying more services and hand-holding, which may be useful for a new trader or investor. For investors, full-service brokers may provide valuable services.
Discount brokers typically charge much lower commissions, providing significant savings to a self-sufficient trader who doesn’t need much personal attention.
If you’re a day trader, you should be actively trading only if you’re well educated and self-sufficient. Because day traders execute a large number of trades, it’s important to keep your commissions as low as possible.