Forex — Definition Explained Simply | Examples & Role
Forex (Foreign Exchange Market) is the international currency exchange market where banks, companies, investors, and traders buy and sell currencies at free-floating exchange rates. It is the largest and most liquid financial market in the world.
Forex (Foreign Exchange Market) is the global market for the exchange of freely convertible currencies. It is an over-the-counter (OTC) system where trades are conducted directly between participants via banks, brokers, and electronic platforms. Forex is the world’s largest financial market with a daily turnover of more than USD 6 trillion (according to the Bank for International Settlements, BIS).
The main feature of the currency market is that most transactions are speculative and do not involve physical delivery of currency. Participants seek to profit from fluctuations in exchange rates of currency pairs. At the same time, Forex plays a vital role in the global economy by facilitating international trade and investment.
Main participants of the Forex market
- Central banks — regulate exchange rates and conduct interventions.
- Commercial banks and corporations — carry out operations for clients and international settlements.
- Investment funds and hedge funds — use Forex for speculation and hedging.
- Retail traders — earn from currency fluctuations through brokers and trading platforms.
Key features of the currency market
- 24-hour operation — open 24 hours a day, 5 days a week.
- High liquidity — currencies can always be bought or sold.
- Currency pair trading — rates are quoted as base/quote currency (e.g., EUR/USD).
- Speculative nature — up to 90% of trades are speculative, aiming at profit from rate differences.
Forex and the global economy
Forex is a key element of the global financial system. It enables companies to conduct international trade, allows investors to diversify assets, and helps governments manage currency reserves. At the same time, Forex is highly volatile and carries risks, especially for retail traders.
Examples
- A trader buys euros for dollars at EUR/USD = 1.10, planning to sell them later at a higher rate.
- A central bank intervenes in the foreign exchange market to stabilize the exchange rate.
- A German company exchanges euros for dollars to pay for imports from the USA.