Lesson: Foreign exchange

What Is Foreign Exchange Trading?

When you're making trades in the forex market, you're buying the currency of one nation and simultaneously selling the currency of another nation.
There's no physical exchange of money. Traders are taking a position in a specific currency, with the hope that it will gain in value relative to the other currency.

How Does the Forex Market Differ From Other Markets?

The Forex is a decentralized market. It has no physical existence and no owner or management.
There are no clearing houses or central bodies to oversee the forex. That means traders aren't held to strict standards or regulations, as are seen in the stock, futures, or options markets.
It also means there are fewer fees and commissions to pay.

The Bottom Line

The forex, or FX, is the global marketplace for the exchange of currencies. As such, it determines the value of one currency against another in the real world.
Forex prices determine the amount of money a traveler gets when exchanging one currency for another. Forex prices also influence global trade, as companies buying or selling across borders must take currency fluctuations into account when determining their costs. Inevitably, the forex has an impact on consumer prices, as global exchange rates increase or lower the prices of imported components.
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Foreign exchange trading was once something that people only did when they needed foreign currency to use when traveling in other countries.
This involved exchanging some of their home country's currency for another at a bank or foreign exchange broker, and they would receive their foreign currency at the current exchange rate offered by the bank or broker.¹
These days, when you hear someone refer to foreign exchange trading or forex, they are usually referring to a type of investment trading that has now become common.² Many people wonder how foreign currency trading, often shortened to forex trading, works because they're interested in learning how to trade currencies for themselves.

Note

Just like with trading stocks, forex traders can speculate on the fluctuating values of currencies between two countries, and it's done for profit.³