The foreign exchange market is the largest financial market in the whole world. Few years ago, only the large financial institutions, secretive hedge funds and multinational corporations used to take part in the forex market. But now times have changed, and individual investors are showing interest in this market. If you are a novice and have little idea about the forex market, read on to find the answers to the most frequently asked questions about the foreign exchange market:
1. In forex trading, where is the commission?
Investors, who trade futures, stocks or options, generally hire a broker who acts as an agent between the buyer and the seller. According to the customer’s instructions, the broker takes the order to an exchange and tries to execute it. When the customer buys or sells the tradable instrument, the broker is paid a commission for providing this service.

The forex market is a principals- only market, as there are no commissions in this market. The forex firms are actually dealers and not brokers. All the investors must understand this critical distinction.

2. How is the forex market different from other markets?
In contrary to stocks, options and futures, currency trading does not take place on a regulated exchange. There is no central governing body to control the market, there is no arbitration panel to adjudicate disputes and there is no clearing house to guarantee the trades. The traders trade with each other through credit agreements.

3. What is meant by pip?
Pip means “percentage in point” and is regarded as the smallest increment of trade in FX. Prices are quoted to the fourth decimal point in the forex market.

4. What can you really buy or sell in the currency market?
In short, the answer is “nothing”. No physical exchange of currencies ever takes place in the retail forex market, as it is purely speculative. All the trades exist only as computer entries and are netted out on the basis of market price.

5. What ere the currencies that are traded in the forex market?
There are some retail traders who trade exotic currencies such as the Czech koruna or the Thai baht, but the majority trade the seven most liquid currency pairs in the world. The four major currency pairs are:
  • EUR/USD (euro/dollar)
  • GBP/USD (British pound/dollar)
  • USD/JPY (dollar/Japanese yen)
  • USD/CHF (dollar/Swiss franc)

The other three commodity pairs are:
  • USD/CAD (dollar/Canadian dollar)
  • AUD/USD (Australian dollar/dollar)
  • NZD/USD (New Zealand dollar/dollar)

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