Foreign exchange (Forex or FX)
The term “foreign exchange,” oftentimes shortened to forex, usually refers to the actual trade of currencies, therefore involving the purchase of one currency using another. The two currencies involved comprise a currency pair. For a transaction to take place, the entity wishing to purchase a certain currency, which is referred to as the base currency, must know how much of the counter currency, or that which is currently on hand, corresponds with a unit of the base currency. The equivalent value is known as the currency pair’s exchange rate.
Banks and other investing entities may engage in foreign exchange transactions as dealers, although other agencies may also be authorized to handle such transactions. These dealers are considered independent and do not need to conduct business within the confines of a central exchange center, such as a stock exchange.
Foreign exchange is also important to businesses which conduct operations on an international scale, or at least those who enter transactions with entities from other countries. On a smaller scale, individuals who need another currency for travel, purchasing, and other personal purposes also participate in forex trading. They may not necessarily have the objective of making profits out of such transactions, but these are necessary for basic needs to be met.
On the other hand, foreign exchange can also refer to the actual market where trading occurs. This is an international and decentralized market, where trade is conducted over-the-counter. In comparison with other types of markets, the forex market is highly liquid and trading is done round the clock on weekdays. Since dealers are located in countless locations all over the globe, and due to the nature of the trade, the foreign exchange market is one of the most accessible to the regular individual.