When start trading in the Forex, what is important is that all the terms used are really clear in the meaning. It can be very easy for a novice to make mistakes due to the misunderstanding of the used terms. The first important term is the ‘lot‘, that is, usually, a precise quantity of asset or currency. During the trades is very probable that the purchases are done in terms of lots or, for small quantities, in terms of mini lot or micro lot. As it is easy to understand, mini and micro lots are parts of the lot, and in particular, they represent the tenth part and the thousandth part of the lot.
Another term very often used in the Forex trading is the Pips, that is the Percentage in Points. It is a small measure, very useful in the change of the currency pairs, In fact, the relationship among the different pairs is always complex and needs of the multiples and submultiples of the units. So the use of the Pips allows to work with the decimal numbers.
In the Forex language there are both terms connected to the quantity of the currencies or stocks and terms connected to the actions. For example very common terms, also entered in the everyday languages are the bid and the ask. The bid is the offer that is made by the investor or the trader, or better, it is the price at which you (or the broker for you) want to but a currency pair, or an asset. On the contrary, the ask is the price at which you (or again the broker for you) want to sell. Of course to have a transaction, usually the buyer and the seller have to make an agreement that can be more or less convenient for the buyer or for the seller depending on several conditions. In the best cases, the agreement find a price that is in the middle of the one asked and the one bidden.
Another very used term is the spread. The spread is the quantity of pips (see above) between the ask and bid price, that is the difference between these two parametres. So all these terms are connected and it is very important to understand what they mean to understand what the spread is. If a broker buys a currency for 100 and sell it for 102 the spread is the difference between 102 and 100. These terms have been used to better undestand the meaning of the difference between dib and ask, but in the reality, the spread goes on the decimal terms, so true values could be for examples 10.0004 and 10.0002.
To conlude, let’s give a look to the ‘leverage’, that is a term used to indicate borrowed funds. In forex the leverage is strictly connected to the gain and the losses, as it magnifies them. Often this involves the risk that borrowing costs will be higher than the income from the asset. This will cause, obviously, a reduction in profits. As an exemple, an investor who buys a stock on 50 % margin will lose 40 % of his money if the stock declines 20 %. Risk may be attributed to a loss in value of collateral assets. Brokers may require the addition of funds when the value of securities hold declines. Also, banks may fail to renew mortgages when the value of real estate declines below the debt’s principal. More,iIf cash flows and profits are sufficient to maintain the ongoing borrowing costs, loans may be called. This may happen when there is little market liquidity and sales by others are depressing prices. It means that as things get bad, leverage goes up, multiplying losses as things continue to go down. This can lead to rapid ruin, even if the underlying asset value decline is mild or temporary. The risk can be lowered by negotiating the terms of leverage, or by maintaining unused room for additional borrowing, and by leveraging only liquid assets.