The forex market is one of the largest financial markets in the world and more traders are entering the market every day. However, many people are still ignorant of the workings of the forex market.
For instance, not many people are aware of the various types of forex accounts available for them to trade in the market. Just like other trading accounts, forex accounts also vary according to funding requirements, specifications, usage, and so on.
What is a Forex Account?
A foreign exchange account, or a forex account, is an account used to hold and trade foreign currencies. It works in the same way as other trading accounts. So, if you wish to trade in forex, you’ll typically open an account, deposit money in your home currency, and use it to buy and sell currency pairs.
If you wish to know more about the different types of forex accounts and get a brief overview of some of them, read on.
Why Is There a Need for Different Types of Accounts?
Different kinds of users need different types of accounts. For instance, the need of a trader and a broker would be different. Hence, the account should reflect their needs and facilitate trading according to their needs.
You’ll find traders who can comfortably come up with $100,000 for trading. They can trade position sizes of up to 3 or 5 Standard Lots (corresponding to $30 to $50 per pip) at ease. On the other hand, there would be some traders who are hard-pressed to come up with even $100.
In such a scenario, if the market allows access only to the high rollers and locks out the small-capital traders, it would be hardly fair.
This is one of the reasons for the deregulation of the forex market. As a result, not only private traders can participate in trading, but also those with heavy pockets and those with light pockets can also trade. Through deregulation, traders were able to find the right kind of account for their need and use it accordingly.
In the years since deregulation, the daily market turnover of the forex market rose astronomically, topping $4trillion.
One of the reasons for this growth is that the brokers have found it more beneficial to accommodate everyone in the market, irrespective of their pocket size.
Even for the ECN brokers where the capital requirements are high, different types of accounts are available to accommodate different categories of traders.
As market makers enter the market to provide liquidity, fragmenting these positions and distributing them to even traders with tiny accounts can lead to revenue generation. They can earn fees from all and sundry. Hence, the brokers find it beneficial to categorize the forex accounts as the softer entry-level requirements allow even those with seemingly inconsequential amounts to enter the market.
Types of Forex Accounts
Now that we have discussed why having different kinds of accounts is beneficial to both brokers and traders, let us take a closer look at the types of forex accounts.
There are several types of forex accounts to suit various needs and various kinds of users. However, even though they are known by different names, some of them share the same characteristics and hence, can be grouped under the same category as under:
- Micro or Mini accounts
- Intermediate accounts
- Premium/VIP accounts
Let us consider them in detail:
As the name suggests, micro accounts are small-cap accounts that allow traders to enter the market with very little money – sometimes as low as $100.
Additionally, some brokers have introduced variations of this type of account by allowing deposits that are tinier – often as low as $20 to $50.
It is important to note that these accounts generally restrict the position sizes of trades on the account to micro-lots. In such cases, the increments are usually in the range of 0.01 lots.
This arrangement helps the traders to attain better control of the risk factor on their accounts. However, you should remember that, generally, micro account holders do not get benefits from brokers.
Intermediate accounts typically have the largest variation in terms of account classification. In some sectors, it is popular as the Standard Account, Gold account, the Classic account, and so on.
The characteristic feature of this type of forex account is that the minimum deposit requirement is usually set to $500. However, it can extend up to $1000 on some brokerage platforms.
If you choose an intermediate account, you might be restricted to trading mini-lots. However, certain platforms allow up to 1 standard lot position size on intermediate accounts.
Until recently, the intermediate account was the standard account type that was accessible to entry-level traders in the forex market. It was only two or three years ago, when entry-level capital requirements were reduced, that this ceased to be an entry-level account.
Intermediate account holders enjoy certain benefits from brokers. For instance, the brokers give them bonuses ranging from 50% and sometimes even up to 100% on every new account deposit. Some brokers might offer few other bonuses as well, but it is not a standard practice.
It is evident from the name that VIP or Premium (or Platinum) accounts are intended for those classified as VIP traders.
This account type is earmarked for the high rollers – those traders who can afford to deposit up to $10,000 as account opening capital. VIP traders also enjoy a lot of bonuses.
Brokers who offer bonuses on VIP accounts always give out these traders a 100% bonus. Some of the other benefits enjoyed by the VIP account holders include access to prepaid debit cards, travel benefits, access to technical and fundamental analyses, and several other bonuses.
Furthermore, the VIP account holders can trade an unlimited number of Standard Lots. This means they have a greater potential to earn some good money on their accounts.
As you can see, the type of forex account depends on the need and resources at your disposal. There is no right or wrong account type. It all depends on what are your specific needs and which account will match your circumstances.
Make sure you have a clear idea of your resources and goals before making a definitive selection. And once you are clear about it, opening a forex account is almost as simple and easy as opening a bank account.
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