What Is an Online Currency Exchange?

An online currency exchange, or electronic forex exchange, is an internet-based platform that facilitates the exchange of currencies between countries. Like their physical counterparts, online currency exchanges make money by charging a nominal fee and/or through the bid-ask spread in a currency. However, using a centralized online platform tends to yield lower costs as well as offering greater transparency and efficiency.

Key Takeaways

  • An online currency exchange is a centralized online platform for changing one currency into another.
  • An online currency exchange affords immediate transparency, which allows the respective parties to keep tabs on all aspects of the transaction, thereby increasing efficiency, lowering costs, and enhancing security.
  • Currency exchanges earn a profit off the bid-ask spread for the currency and may also charge a fee or commission.
  • Forex brokers usually offer online currency exchange as part of their platforms.

Understanding an Online Currency Exchange

Currency exchange businesses, both physical and online, allow you to exchange one country's currency for another by executing buy and sell transactions. For example, if you have U.S. dollars and you want to exchange them for Australian dollars, you would bring your U.S. dollars (or bank card) to the currency exchange store and buy Australian dollars with them. The amount you would be able to purchase would be dependent on the international spot rate, which is basically a daily changing value set by a network of banks that trade currencies.

An online currency exchange is, as is implied in the term, an online system for exchanging one country's currency for another, whether it be at a governmental level (between countries) or at a corporate level (business to business). These exchanges are comprised of a network of computers that connect banks, brokers, and traders and offer immediate transparency by enabling the respective parties to keep tabs on all aspects of the transaction.

With the advent of the internet, numerous online currency exchanges have popped up to increase efficiency, lower costs and enhance the security of exchanging currencies. Import and export businesses, travelers, freelancers, and many others can determine the exact price of a product or service in any currency from around the globe by utilizing an online currency exchange. Typically, most sites allow you to lock in the current rate while you make your purchase.

To ensure you are being quoted a fair rate, it's wise to consult a universal currency converter, which enable users to convert currency values based on present-day exchange rates and can be easily be found for free on the internet.

Special Considerations

The online currency exchange is frequently part of a broker's trading platform. Some brokers offer the service for free, and others will require a payment, either as a portion of the spread or as a set fee. 

This platform is the investor's or trader's portal to the markets. As such, traders should make sure the platform and any software have the following features:

  • Easy to use and visually pleasing
  • A variety of technical and fundamental analysis tools
  • Trades can be entered and exited with ease
  • Clear buy and sell buttons, as well as easy-to-read trade pricing
  • Customization of screen layout
  • Ability to set automated trades and trading alerts
  • Flexibility to set order options and entries

Most brokers will offer the use of a free demo account to allow traders to test the trading platform before opening and funding an account. Also, since most brokers are usually remote from traders and investors, those interested in using such a system should research the providers, as fees, availability, security, and currencies serviced can vary widely.

Limitations of Online Currency Exchanges

Not every nation's currency can be exchanged or converted. Some countries have monetary policies that place restrictions on the convertibility of their money, even though currency convertibility is essential in a global economy, and a currency that is nonconvertible poses significant barriers to trade and tourism.

Some brokers may not handle the exchange of currencies for a contract for differences (CFD). During the settlement in a CFD futures contract arrangement, cash payments substitute for the delivery of the asset.

Also, not every broker may handle the exchange of cryptocurrencies. A central bank does not regulate virtual currencies, and the exchange for legal tender is not available for all virtual currencies.