Some of those questions aren't actually going to be resolved until we've gotten feedback from the beta version, as we've never released a document reader before and hence there hasn't really been any customer input at all into the design of it. But as it stands right now, when you tap on a character the software checks first to see if it's the first character in a multi-character compound. If it is, it brings up the longest matching compound, if not, if looks back to see if it's the second, third, or fourth character in a compound and brings up the longest of those compounds if so. If there's no compound match in either direction it brings up an entry for the character by itself. The big arrows to the left and right of the headword in reader screenshots are an easy way to change the highlight if you want to look at a different word/character, the arrows on the left side move the start of the highlight and the arrows on the right move the end. All of this can also be controlled from the 5-way navigator pad; the middle button toggles between adjusting the highlight (each of the 4 directions mapped to one of those four buttons) and moving it around like a cursor (so up moves up one line in the document, down down one line, etc).
. And there's an easy way to specify the encoding of a file.