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The Currency / Foreign Exchange market is the
worlds largest and most dynamic market. Nearly $1.8 trillion is
traded every day. The word Forex is derived from the words Foreign
Exchange.
A Broker is an individual or firm that acts
as an intermediary between buyer and seller. Forex brokers are firms
that deal in foreign exchange. The foreign exchange market is quite
similar to the equity markets, except that typical forex brokers do
not charge a commission. However, forex brokers are required to have
a license.
Forex brokers earn money from the spread
(also called ?pip?. The spread is the difference between the prices
at which a currency is bought and sold. A pip is the smallest price
increment in a currency. For example, in Euro/US Dollar (EUR/USD), a
move from 0.9008 to 0.9009 is one pip. In US Dollar/Japanese Yen (USD/JPY),
a move from 127.41 to 127.42 is one pip.
Forex brokers
can be compared on the basis of the spread they charge. Most forex
brokers publish live or delayed prices on their websites so that the
investor can compare the spreads. It is, however, necessary to check
if the spread is fixed or variable. Variable spreads appear small
and attractive when the market is quiet, but when the market gets
busy the forex broker widens the spread, meaning that the investor
will gain only if the market is favorable.
Forex
brokers are usually tied to large banks or lending institutions.
This is because of the huge sums of money traded in the foreign
exchange markets. Forex brokers are required to register with the
Futures Commission Merchant (FCM), and are regulated by the
Commodity Futures Trading Commission (CFTC).
A new
trend among forex brokers is the emergence of online forex brokers,
who offer trading facilities to ?retail traders using advanced
technology. With these facilities, anyone with a computer and an
Internet connection can trade in the forex markets.
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