Loading the player...

What is the 'Foreign Exchange Market'

The foreign exchange market is the market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. 

BREAKING DOWN 'Foreign Exchange Market'

The foreign exchange market – also called forex, FX, or currency market – trades currencies. It is considered to be the largest financial market in the world. Aside from providing a floor for the buying, selling, exchanging and speculation of currencies, the forex market also enables currency conversion for international trade and investments.

The forex market has unique characteristics and properties that make it an attractive market for investors who want to optimize their profits.

Highly Liquid

The forex market has enticed retail currency traders from all over the world because of its benefits. One of the benefits of trading currencies is its massive trading volume, which covers the largest asset class globally. This means that currency traders are provided with high liquidity.

Open 24 Hours a Day, 5 Days a Week

In the forex market, as one major forex market closes, another market in a different part of the world opens for business. Unlike stocks, the forex market operates 24 hours daily except on weekends. Traders find this as one of the most compelling reasons to choose forex, since it provides convenient opportunities for those who are in school or work during regular work days and hours.

Leverage

The leverage given in the forex market is one of the highest forms of leverage that traders and investors can use. Leverage is a loan given to an investor by his broker. With this loan, investors are able to enhance profits and gains by increasing traders’ and investors’ control over the currencies they are trading.

For example, investors who have a $1,000 forex market account can trade $100,000 worth of currency with a margin of 1 percent, with a 100:1 leverage.

The Biggest in the World of Finance

The foreign exchange market is unique for several reasons, mainly because of its size. Trading volume in the forex market is generally very large because of the number of people who participate, the ease of trading as well as accessibility to the market. As an example, trading in foreign exchange markets averaged $5.1 trillion per day in April 2016, according to the Bank for International Settlements, which is owned by 60 central banks, and is used to work in monetary and financial responsibility. 

Benefits of Using the Forex Market

There are some key factors that differentiate the forex market from others like the stock market. There are fewer rules, which means investors aren't held to strict standards or regulations as those in other markets. There are no clearing houses and no central bodies that oversee the forex market. Most investors won't have to pay the traditional fees or commissions that you would on another market. Because the market is open 24 hours a day, you can trade at any time of day, which means there's nocut off time to be able to participate in the market. Finally, if you're worried about risk and reward, you can get in and out whenever you want and you can buy as much currency as you can afford. 

RELATED TERMS
  1. Forex Account

    Opening a forex account is the first step to becoming a forex ...
  2. Forex Option & Currency Trading ...

    A security that allows currency traders to realize gains without ...
  3. Forex Market Hours

    Forex hours refers to the time when participants in the $5 trillion ...
  4. Forex Training

    A form of instruction or mentorship that provides information ...
  5. Mine And Yours

    Mine and yours are shorthand terms used by forex traders, standing ...
  6. Forex Charts

    A charting package that allows a trader to view historical currency ...
Related Articles
  1. Trading

    Forex trading: A beginner's guide

    Learn about the forex market and some trading strategies to get started.
  2. Trading

    Forex Broker Guide

    A Guide To Choosing a Forex Broker
  3. Trading

    Forex Tutorial: The Forex Market

    In this online tutorial, beginners and experts alike can learn the ins and outs of the retail forex market.
  4. Trading

    Forex Trading: A Beginner’s Guide

    As businesses continue to expand to markets all over the globe, the need to complete transactions in other countries’ currencies is only going to grow.
  5. Trading

    Can Forex Trading Make You Rich?

    Forex trading may be profitable for hedge funds or unusually skilled currency traders, but for average retail traders, forex trading can lead to huge losses.
  6. Trading

    Forex or Stock Trading: Which Works For You?

    Even though the odds favor stock trading, forex trading has several advantages to offer a particular type of investor.
  7. Trading

    The Pros And Cons Of Trading Forex In An Overseas Account

    The Dodd-Frank Act of 2010 could impact whether overseas accounts benefit FX investors.
RELATED FAQS
  1. What am I buying and selling in the forex market?

    The forex market is the largest market in the world. According to the Triennial Central Bank Survey conducted by the Bank ... Read Answer >>
  2. Where is the central location of the forex market?

    There is no central location of the foreign exchange market, often referred to as the forex (FX) market. Transactions in ... Read Answer >>
  3. How do you make money trading money?

    Trading money, particularly in the forex market, is a speculative risk, as you are betting that the value of a currency will ... Read Answer >>
  4. How do you Fund a Forex Account?

    Global currencies are traded on the forex market. Here's how to tap in. Read Answer >>
  5. Can I trade a currency when its main market is closed?

    In the forex market, currencies from all over the world can be traded at all times of the day. The forex market is very liquid, ... Read Answer >>
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center