Some forex brokers allow trading on margin where you would put down an initial deposit say 5% which will allow you to control a much larger position. This means the potential gains are higher but you expose yourself to much higher risk. If the trade goes against you, your broker may ask you to put up more margin to cover any potential losses.
The market you usually see quoted is the ‘spot’ price. This term is used for any financial instrument which is delivered immediately ‘on the spot’. A spot trade is usually cleared within 2 business days. However because most forex currency trading is undertaken by speculators, they will not want to take ‘delivery’ of the currency but will maintain or ‘roll-over’ their position to the next day or until they close down the trade.
There is also a ‘forward’ market for forex where the price is quoted for ‘delivery’ at a set date in the future, often a few months out.
Let’s look at a quote from a spread betting firm for GBP/USD
Spot price (
Forward (June 2006) 1.7369
You can see that the June forward price is slightly higher than the spot. The difference is what the market expects on the future movement of the currency. Here the pound is expected to strengthen against the dollar.
Spread betting firms allow you to bet on the value of each tick.
For example, you are bearish on the dollar so you could buy the GBP/USD June 06 contract for 1.7381 for £5 per tick (In spread betting the trading commission is taken from the spread, in this case 12 points)
If the contract rises 100 ticks you will make £500 (100 x £5)
If the contract goes down 100 ticks you will lose the £500.