What does 'Foreign Exchange (Forex)' mean?

« Back to Financial Terms Index

Foreign exchange (Forex) refers to the buying and selling of currencies on the foreign exchange market. The foreign exchange market is the largest financial market in the world, with an average daily trading volume of over $5 trillion. It is a decentralised market, which means that it is not controlled by a single institution or government.

Participants in the Forex market include central banks, commercial banks, other financial institutions, and retail investors. They buy and sell currencies to manage their own financial risks, to speculate on the movement of currency prices, or to facilitate international trade and investments.

The value of one currency is determined by its exchange rate with another currency. Exchange rates fluctuate based on a variety of factors such as economic data, political developments, and market sentiment.

Forex trading can be done through a broker or through a bank. Retail investors typically use a broker to access the Forex market, while larger institutions such as banks may participate directly.

Forex traders can make money by buying a currency at a lower price and then selling it at a higher price, or by selling a currency at a higher price and then buying it back at a lower price. Forex trading can also be done using derivatives such as options and futures contracts, which allow traders to speculate on the future direction of exchange rates.

Forex trading is highly leveraged, meaning that traders can control large positions with a relatively small amount of capital. However, this also means that the potential for losses is high, so it is important for traders to have a well-defined risk management strategy in place.

« Back to Financial Terms Index