The foreign exchange market is a worldwide system for the
trading of foreign currencies. It is a decentralized market where trades are
made over the counter. Forex and FX market are other interchangeable names used
for the foreign exchange market. Because the FX market place is decentralized,
major financial centres throughout the world act as anchors for the trading
which occurs around the clock. Trading on this market occurs 24 hours a day 7
days a week. The market is only closed for a few hours on the weekends mainly
for maintenance.
The market for foreign exchange was created to allow
countries, financial institutions, banks, individuals and companies to convert
one currency into another currency. This conversion of currency assists in the
international trade process and investment in foreign countries. This
conversion of currency allows a company in one country to import or export
goods to another country and pay for the goods using the local currency in the
other country.
Prior to World War I countries used the gold standard to set
the value of their currency. The currency was set according to the price of an
ounce of gold. During World War, I countries suspended the use of the gold
standard because of the disruption in the movement of goods. The gold standard
was reinstated after the end of the War but was suspended again with the
outbreak of World War II. After this war countries stopped using the gold
standard. With the disbandment of the gold standard, the values of currencies
were based on supply and demand and this opened the foreign exchange market to
anyone that wanted to trade currencies. Prior to this time, only countries were
able to trade countries.
This market for foreign exchange is the largest financial
market place in the world. This market is larger than all bond markets in the
world combined. Almost a trillion dollars in trade volume is handled on this
market daily. There is no central market but instead, the currency is traded over
the counter. Anyone trading on this market can choose from a number of
different dealers or brokers in order to choose with whom they want to trade.
This allows traders to compare the pricing offered by different dealers and use
that knowledge to make the best trade.
If you are interested in buying and selling of currency, then
your trading will be handled on the market for foreign exchange or Forex.