What is an Online Currency Exchange

The online currency exchange is an internet-based system for exchanging one country's currency for another on the foreign exchange (FX). Comprised of a network of computers that connect banks, brokers, and traders the system allows the conversion of currencies for delivery. A forex broker usually offers an online currency exchange as part of their platform.

The particular platform which processes the transaction will vary by the broker offering it, the location of the trader and the currency pairs traded.

BREAKING DOWN Online Currency Exchange

​​​​​​​Forex brokers are firms that provide currency traders with access to a trading platform and a method to make online currency exchanges. Some brokers offer the service for free, and others will require a payment for the services, either as a portion of the spread or as a set fee. Most brokers should offer the free use of a universal currency converter. Using this system 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. Typically, most sites allow you to lock-in the current rate while you make your purchase.

The online currency exchange is frequently part of a broker's trading platform. This platform is the investor's or trader's portal to the markets. As such, traders should make sure the platform and any software is

  • Easy to use and visually pleasing
  • Has 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.

(To learn more see Investopedia's 5 Tips For Selecting A Forex Broker and Online Forex Broker Reviews)

Limitations of Online Currency Exchanges

Not every national currency can be exchanged or converted for other money. Some countries have monetary policies which place restrictions on the convertibility of their money.  Currency convertibility is essential in a global economy and critical for international commerce. A currency that is inconvertible poses significant barriers to trade and tourism.

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

Also, not every broker may handle the exchange of cryptocurrencies. A cryptocurrency is an organic digital or virtual money which uses blockchain or cryptography security. A central bank does not regulate virtual currencies, and the exchange for legal tender is not available for all virtual currencies.