For many, the process of sending money to relatives overseas or investing in a foreign property involves currency exchange. The global foreign exchange market, also known as the forex market, is a decentralized international marketplace for the trading of currencies. The market determines the relative value of a currency by setting the market price at which one currency will be traded for another. The forex market is open around the world, 24 hours a day with the exception of weekends.
The foreign exchange market is the largest and most liquid market in the world, made up of a network of financial centers that trade currencies over-the-counter (OTC). The major participants in this market are large international banks. These banks, in turn, use the forex market to manage their exposures to a variety of different types of financial risk. The markets are based on the principle that a currency’s “value” is determined by supply and demand. Traders, investors, and exporters all interact with this market to make purchases and sales in order to profit from differences in relative valuations.
A stronger currency benefits sellers and hurts buyers. As a result, the forex market is highly responsive to news that can impact the outlook for a country’s economy or its perceived stability. This information, when released to the public, can cause a dramatic shift in investor sentiment and subsequently affect prices. This is a key reason why it is important to understand the fundamentals of the foreign exchange market before you get involved in trading.
About the Author
