Risks, rights and obligations of forex

Although every investment (like gambling) necessitates some risk, forex traders must be aware that losing in trading can be substantial like for instance in an off-exchange forex contracts. Moreover, here are more substantial risks involved:

� Entire investment could be lost by a forex trader. A deposit of money (or more commonly known as margin or security deposit) is a prerequisite for individuals before trading, especially in buying and selling an off-shore exchange contract. A deposit, even if it's only a small amount of money, enables a trader to get a value of forex position that is many times worth than his actual account. This is what's known as leverage. In cases where prices fluctuates in an unfavorable direction, the consequences of having a high leverage is a big loss that's relative to the initial or full deposited amount.

� Clearing organizations does not guarantee off-exchange forex trades. There's no insurance on money deposited to trade forex contracts. It doesn't even cover cases of bankruptcy. Money deposited by customers in an FDIC bank account that is insured does not extend when the dealer files for bankruptcy.

� Central marketplace does not exist. There isn't a central marketplace even in retail forex OTC markets that have many sellers and buyers, which is very unlike regulated forex futures. It's up for the forex dealer to determine the price of the trade, so an individual trader can only rely on the integrity of the dealer to set a fair price.

� Sales of forex OTC futures are allowed by the CEA or the Commodity Exchange Act. Moreover, they permit the option of retail customers for a counterparty, if and only if, it is a regulated unit. Saving and bank associations are included in these units and so are registered brokers with, more often than not, their affiliates. In addition, they also allow futures commission merchants and their affiliates, financial holding firms, investment bank holding firms and insurance firms so long they are all duly registered.

However, as a general rule, unregulated entities and firms and their activities in the market are the sole responsibility of the forex dealer. In addition, the standards of a forex dealer are as follows:

� The observance of high standards of honor in commerce and equitable ethics in trading.

� The supervision of agents and employees and any of their affiliates to the retail transactions.

� The maintenance of a minimal required net capital that is based on the price of customer positions; and,

� The collections of security deposits of their customers.

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