Even though forex (FX) is the largest financial market in the world, it is a relatively unfamiliar terrain for retail traders. Until the popularization of internet trading, forex was primarily the domain of large financial institutions, multinational corporations, and hedge funds. But time changes everything, and individual traders are now hunting for information on forex.
If a trader is an FX novice or just need a refresher course on the basics of currency trading, here are some of the most common questions about the forex market.
What is the Meaning of Forex Commission?
Investors trading stocks, futures, or potions usually gets a broker who acts as an agent in the transaction. The broker will be the one who takes the order to an exchange and tries to execute it based on the customer’s instructions. Then, the broker will be paid a commission when the customer buys and sells the tradable instrument for offering the service.
The forex industry does not have commissions. Contrary to exchange-based markets, FX is a principals-only market, and forex firms are dealers and not brokers. Also, unlike brokers, dealers assume the market risk by serving as a counterparty to the investor’s trade. Instead of charging for a commission, they make their money through the bid-ask spread.
What is Pip?
Pip actually stands for percentage in point and is the smallest increment of trade in forex. For the FX market, prices are quoted to the fourth decimal point. But among all the major currencies, the only exception to the rule is the Japanese yen. A dollar is worth about 100 Japanese yen. Thus, in the USD/JPY pair, the quotation is only taken out of two decimal points.
What Do Traders Really Trade?
The exact answer to this is nothing. The retail FX market is undoubtedly a speculative market. And no physical exchange of currencies ever happens. Every trade exists only as computer entries and is netted out depending on market price. When it comes to dollar-denominated accounts, every profit or loss is calculated in dollars and recorded as such on the trader’s account.
The main reason the forex market exists is to facilitate the exchange of one currency into another for multinational corporations that must continually trade currencies. But these day-to-day corporate needs include only about 20% of the market volume. And eighty percent of trades in the currency market are speculative in nature managed by large financial institutions, multi-billion hedge funds, and individuals who wish to share their opinions on the economic and geopolitical events of the day.