What are you actually buying when you “trade forex”?

What is forex?

Forex is the currency market, and it is mostly an “over-the-counter” (OTC) market, with no single central exchange. What is offered to individuals as “forex trading” in a leveraged trading account, though, is a contract with the broker whose value changes with the price of a currency pair, and no currency reaches you in it.

When you buy currency from an exchange house, you actually own it. “Buying” a currency pair through a leveraged trading account is something else entirely: no currency reaches you; instead, you enter into a contract with your broker whose value changes as the price your broker quotes changes. The difference is not a matter of wording; it is what determines who stands on the other side of your trade, where the price comes from, and what you own if things go wrong.

Three transactions that look alike — and are not

The diagram below compares three transactions: an exchange house or bank, a futures contract on an exchange, and a retail trading account with leverage and overnight financing (swap).

What actually changes hands in each case

On small screens, drag the diagram sideways to see all three cases

In everyday speech, all three are called “currency trading”, but they are in fact three different products:

1. Exchange house or bank. You pay riyals and receive an amount in euros. Ownership passes to you immediately, and the transaction ends there: no open position, and nothing is charged to you at the end of the day. The only cost is the difference between the exchange house’s buying price and its selling price. Hypothetical example: if an exchange house bought euros at 4.05 riyals and sold them at 4.15 riyals, converting 10,000 riyals into euros and then immediately back into riyals would leave you with about 9,759 riyals; the difference — about 241 riyals — is the cost of the two transactions.

2. A futures contract traded on an exchange. The standard euro contract on the Chicago Mercantile Exchange (CME) is 125,000 euros in size, and it is settled by physical delivery at expiry — although most traders close their positions, or move them to the next contract, before the delivery date. The clearing house stands as a party between buyer and seller, and the price is public to everyone in a single central market. Here you do not own the euros today; you own a contract on them with standardised terms. Alongside it stand forward contracts, which institutions agree with their banks over the counter (OTC); they are a large share of the market, but they are not a product for individuals.

3. A retail trading account with a broker. What you open is usually a “contract for differences” (CFD) or “leveraged rolling spot forex”. Real spot forex is delivered after two business days (T+2); in a retail account nothing is delivered: every night the broker rolls the delivery date forward to the next day, so the position stays open with no expiry date — and that is exactly what “rolling” means. The contract is settled in cash, nothing is delivered under it, the price comes from your broker, and the counterparty to the contract is the broker itself. The broker may hedge its position with a liquidity provider, but that is a contract between the broker and its provider, not between you and anyone. In its 2018 measures, the European Securities and Markets Authority (ESMA) defined a CFD as a cash-settled derivative contract whose purpose is to give you exposure — up or down — to movements in the price of an asset. The UK’s Financial Conduct Authority (FCA) explicitly places rolling spot forex under the same restrictions that apply to CFDs, and requires the product to be leveraged to fall within their scope.

An important distinction

Not every forex transaction is a CFD. Changing money at an airport, or a bank transfer in a foreign currency, is a real ownership transaction, and the futures and options traded on exchanges are lawful products with their own markets and clearing houses. The CFD is only one of the ways to gain exposure to currency movements, and it is the most common one in the retail accounts marketed to individuals in the Gulf.

Who stands on the other side — and why it matters to you

The currency market is mostly an “over-the-counter” market: there is no single central exchange for spot forex, and no single official price that everyone is bound by. In the latest triennial survey by the Bank for International Settlements (BIS) — April 2025 — average daily trading reached 9.6 trillion dollars, of which 3 trillion was in the spot market, or 31%; the rest was swaps, forwards and options, mostly between institutions rather than individuals.

This has four practical consequences for your account:

• The price you see is your broker’s price, and it may differ slightly from another broker’s price at the same moment.
• There is no clearing house standing between you and the broker. What protects your money is the broker’s licence, the terms of your account and the way client money is segregated; there is no third party guaranteeing the trade.
• You close the position with the same broker you opened it with, at the price that broker quotes at that moment.
• Some brokers hedge their clients’ positions in the market, and some keep them on their own account; in the second case, your loss is directly the broker’s gain. Ask your broker about its execution model before you ask about the spread.

How a pair’s price is read, and where you pay the first cost

Every pair is written with two currencies: the first is the base currency, the one you buy or sell; the second is the quote currency, in which the price of one unit of the first is measured. When EUR/USD is shown at 1.08520, it means that one euro is worth 1.08520 dollars.

Because the broker quotes two prices — one at which it buys from you and one at which it sells to you — the difference between them, called the spread, is a cost you pay the moment you open the position, before the price has moved a single step. In a hypothetical example, the broker quotes 1.08500 to buy from you and 1.08520 to sell to you, a difference of two pips; a pip is the smallest usual change in this pair’s price, and for this pair it equals 0.0001. On a position of 10,000 euros, this difference is worth two dollars, or about 7.5 riyals.

Anatomy of a currency pair’s price: two prices, not one

On small screens, drag the diagram sideways to see all of it

Leverage: what you put down, and what your profit and loss move on

Margin is an amount held from your balance as collateral for the position; it is not a price you pay. Profit and loss are calculated on the full position size, not on the margin. In retail accounts, position size is measured in lots: a standard lot is 100,000 units of the base currency, so 0.1 lot equals 10,000 euros. At the average price from the previous example (1.0851), and converting dollars to riyals at the official rate of 3.75, the size of this position is about 40,691 riyals.

• At 30:1 leverage — the cap that applies to a retail client in the European Union and the United Kingdom for what the rules call major currency pairs, a list that differs slightly from one regulator to another — margin of approximately 1,356 riyals is held.
• At 500:1 leverage — and leverage of this size is not offered to a retail client within those two regimes — about 81 riyals is held on the same position.
• A move of 50 pips is worth 187.5 riyals in both cases: about 14% of the first margin, and about 230% of the second — more than double it. That last figure is reached only with a broker that does not apply a forced close-out, or in a price gap at the open; with a forced close-out, the position ends long before that.

Margin is not the price of the trade, but collateral held against it

The amount itself has not changed; what has changed is the size of the reserve that absorbs the move. That is why the UK and European rules, for a retail client’s account, pair the leverage cap with a forced close-out of your positions when the funds in your account — cash and unrealised profits — fall to about half of the margin required for your open positions taken together, not position by position, and with negative balance protection that limits your liability to the funds in your account. These protections are not only European: the rules of the Dubai Financial Services Authority (DFSA) require a firm it licenses that deals in CFDs and similar leveraged over-the-counter derivatives to close all open positions in a retail client’s account if its net equity falls below 50% of the margin deposited in that account, and define net equity as that margin plus the profit or loss on the open positions; and they limit a retail client’s liability for these products to the funds in the trading account connected to them. Both rules were made by an amendment to the DFSA’s rulebook in April 2021. Its rules in the Dubai International Financial Centre (DIFC) classify the same product as a leveraged contract for differences or a leveraged rolling spot forex contract — the same classification the FCA uses. But these remain the rules of particular authorities, not a global rule: whether they apply depends on the authority that licenses the entity that opens your account, not on where you live.

And where do Saudi Arabia and the UAE stand on this?

Here the picture differs from what many people think. The definitions of the Saudi Capital Market Authority (CMA) include “contracts for differences” among securities, and define a “derivative” as a contract for differences, a future or an option. Article 45 of the Capital Market Institutions Regulations provides that “A capital market institution may not effect a margin transaction with a client or for his account on a derivative contract.” (The Authority’s unofficial English translation; the official text is Arabic.)

The scope of this text should be read as it stands: a restriction on what institutions licensed in Saudi Arabia can do on margin, not a general judgement on the product itself, and not a description of the status of any particular company. But its practical consequence for you is clear: a leveraged trading account on CFDs is not a service that a capital market institution licensed in Saudi Arabia can provide to you on margin. Notably, the Saudi definition itself excludes from “contracts for differences” the cases in which the parties intend to make a profit or avoid a loss by actually taking delivery of the asset — which is exactly the difference between the exchange house and the trading account that this lesson began with.

So if you are offered an account like this, checking starts from the positive side, not from warning lists. The CMA publishes on its website a register of licensed “Financial Market Institutions”, and next to each name appear the activities it is authorised to carry out: Dealing, Managing, Arranging, Advising and Custody. Look up the company’s name in the register, then check whether the activity being offered to you is within what it is licensed for in the first place. These are two different questions, and answering one does not answer the other.

The CMA also publishes a list titled “Unlicensed Companies”, and says that it does not contain every unlicensed company, and that investors should verify any entity before dealing with it. If your broker’s name appears on it, that is a negative signal and reason enough to stop; if it does not, that does not mean the broker is licensed: absence from it is not approval.

And the existence of a licence says nothing by itself about what it contains: the protections follow the text of the licensing authority’s rules, not the mere existence of a licence document. The details of who licenses what in the Gulf are the subject of a later lesson in this level.

The costs you see, and the ones you don’t

• The spread. Paid when you open each position, whether the price then rises or falls.
• Commission. In some account types it is charged separately from the spread; and “commission-free” usually means that the cost is inside the spread, not that it does not exist.
• Overnight financing. An amount deducted or added for every night the position stays open, because the delivery date is rolled forward night by night; its size follows the difference between the interest rates on the two currencies — which is why it may be in your favour rather than against you. Platforms call it “swap”, and many brokers in the Gulf call it “رسوم التبييت” (literally, “overnight-holding fees”). In accounts where overnight financing is not charged, another arrangement takes its place, and its cost is written in the terms of that account.
• Currency conversion. If your account is in dollars and you deposit in riyals, you pay a conversion difference on deposit and on withdrawal.

What you own in each case

What you are not usually told

High leverage is marketed as a benefit the broker grants you, but in reality it enlarges the position size on which the spread and overnight financing are charged. A bigger position means more revenue from the spread and overnight financing, whether you win or lose. That alone does not make the broker bad, but it explains why leverage is offered to you before it is explained to you.

A Gulf note

The Saudi riyal is pegged to the dollar. In a statement issued in May 2020, the Saudi Central Bank — then called the Saudi Arabian Monetary Authority — affirmed that it “remains committed to maintaining the exchange rate at the official rate of 3.75 riyals to the dollar” (its English statement). The UAE dirham is likewise pegged, at 3.6725 dirhams to the dollar, according to the tables of the Central Bank of the UAE (CBUAE).

This has two practical consequences for your account, and both are the opposite of what is usually said. The first is that a dollar account does not expose you — as a resident of Saudi Arabia or the UAE — to any exchange-rate fluctuation worth mentioning, unlike an account in euros or pounds. The second is that the peg ties local interest rates to dollar interest rates, as the CBUAE says of the dirham, and the dollar interest rate is one side of the equation that sets the overnight financing deducted from or added to your position every night.

Summary

• An exchange house transfers ownership to you; a leveraged trading account opens a contract for you that has a daily cost, and leverage is not a gift: it is the position size on which your profits and losses move.
• In a retail account, the counterparty is your broker, the price is its price, and there is no clearing house between you and the broker. That is why checking the broker comes before any trade.
• And because the riyal and the dirham are pegged to the dollar, a dollar account is steadier for you than an account in another currency, and the dollar interest rate is what drives your overnight financing.
• And before any deposit: look up the entity in the register of the authority that licensed it (in Saudi Arabia, the register of licensed Financial Market Institutions), make sure the activity offered to you is within its licence, then check the warning list. Absence from the list is not approval.

Warning

Leveraged trading in CFDs carries high risk, and you may lose the entire amount you deposited. This lesson is an educational explanation of the nature of the product, not a recommendation to trade and not investment advice.

The next lesson answers the question that follows directly from this one: what share of people lose money in these accounts, and what reasons keep recurring behind the losses?