The foreign exchange market (Forex) is a global decentralized market for the trading of currencies. In terms of volume of trading it is by far the largest market in the world. The main participants in this market are the larger international banks. Financial centers around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock with the exception of weekends. The foreign exchange market determines the relative values of different currencies.
Every day an average of more than 5.5 trillion dollars in transactions takes place in the forex market. Forex traders attempt to predict the direction of an exchange rate just like stock traders try to predict the direction of a company stock price. Forex traders buy a currency pair when they think the exchange rate will increase and sell a currency pair when they think the exchange rate will decrease.
One unique aspect of this international market is that there is no central marketplace for foreign exchange. Currency trading is conducted electronically over-the-counter which means that all transactions occur via computer networks between traders around the world. The market is open 24 hours a day, five days a week and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Hong Kong, Singapore, Paris and Sydney - across almost every time zone.
Foreign exchange is a leveraged (or margined) product which means that you are only required to deposit a small percentage of the full value of your position to place a forex trade. This means that the potential for profit or loss from an initial capital outlay is significantly higher than in traditional trading. The forex market offers a substantially higher leverage of up to 1:500, and in parts of the world even higher leverage is available.
The internet and electronic trading have opened the doors to active traders and investors around the world to participate in a growing forex market. As the world becomes more and more global investors hunt for opportunities anywhere they can. If you want to take a broad opinion and invest in another country (or sell it short!) forex is an easy way to gain exposure while avoiding vagaries such as foreign securities laws and financial statements in other languages.