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On the Foreign Exchange (Forex), the market quotes a national currency price in relation to a base currency price, typically the United States dollar (USD), and each currency pair represents a ratio of one unit of the base currency to a variable amount of the quoted currency. The big figure of a currency price quote comprises that portion of a quote that precedes the decimal point. For example, in a Forex quote for the Canadian dollar (CAD) with the USD as the base currency, expressed as USD/CAD = 1.2010, the big figure is 1. An alternative name for a big figure is a stem or a handle. Since the big figure of a quote rarely differs from that of the base currency, it is usually eliminated from price quotes on Forex.
Currency pair quotes contain both a bid price and an ask price. The bid price lists the amount of the quoted currency a trader will receive if he sells one unit of the base currency. In the example given, a trader receives 1.2010 Canadian dollars for every United States dollar he sells. On the other hand, the ask price represents how much of the quoted currency the investor must sell to obtain one unit of the base currency. The ask price is always larger than the bid price. Invariably, the big figures of the bid price and the ask price are identical.
Most currency price quotes extend out to five decimal places. Bid and ask prices typically differ in the last two digits, with the ask price higher than the bid price. An ask price is separated from the bid price by a slash and only contains the last two digits of the total price. The spread is defined as the difference between the two prices, expressed as pips or points. A pip refers to the smallest amount of money by which a currency price can change, typically 0.0001 unit.
For example, USD/CAD = 1.2230/37 represents a bid price of 1.2230 and an ask price of 1.2237. Forex eliminates the big figure portion of the second price in the pair. The spread is calculated by subtracting 1.2230 from 1.2237, yielding a value of seven pips. Forex investments are highly leveraged with low margin requirements, meaning that, for as little as $1,000 USD, an investor can direct an investment of $100,000 USD, with a leverage ratio of 100:1. With such an investment, a seven-point shift can mean a gain or loss of $70 USD, which constitutes seven percent of the original investment.
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