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 centers 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. 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 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.
