At its core, Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where all the world’s currencies trade. It is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion. All the world’s combined stock markets don’t even come close to this.

What is Forex?

The ‘Forex definition‘ refers to a global marketplace where nations’ currencies are traded against one another. It’s a vital part of the global economy, enabling international trade and investments by allowing companies and individuals to convert one currency to another. For example, it allows a US business to import goods from Japan and pay in Japanese yen, even though the business’s income is in US dollars.

How Does Forex Work?

Forex transactions take place on the interbank market, an online system where currencies are traded 24 hours a day, five days a week. Forex trading involves a pair of currencies. Usually, the pair includes a ‘base’ currency and a ‘quote’ currency. The ‘base’ currency is quoted relative to the ‘quote’ currency. For instance, if you were looking at the CAD/USD currency pair, the Canadian dollar would be the base currency and the U.S. dollar would be the quote currency.

The Connection to Shares Trading

The world of Forex and the world of securities trading intertwine in several ways. One key area is in the realm of derivatives, specifically futures contracts. A futures contract is essentially a contract to trade a specific asset, like a currency or a share, at a future date and price. Such futures contracts exist for both currencies and shares. Forex traders will often use futures contracts to speculate on the future change in a currency’s exchange rate.

Shares trading, on the other hand, revolves around buying and selling shares of individual companies that are publicly traded on a stock exchange. Similar to Forex, shares trading also involves speculating about the future performance of assets to profit from price fluctuations. However, while Forex is specifically about currency trading, shares trading involves a wider variety of assets, including shares of companies, bonds, commodities, indices, and more.

Who Trades Forex and Why?

Different market participants use Forex for a variety of reasons. Here are a few examples:

• Financial institutions: Banks and other financial institutions make up the largest volume of Forex trading, using the market mainly for speculative purposes and to hedge their currency risks.
• Multinational corporations: Multinational companies use Forex to pay for goods or services from foreign countries. They may also use it for hedging against future exchange rate fluctuations.
• Individual traders: Individual Forex traders who use the currency market to speculate on movements in exchange rates, much like they would in the stock market.

Conclusion

Understanding the forex definition includes realizing its impact and pervasiveness in the global economy. Whether it’s a company hedging against future exchange rate fluctuation risks or individuals wishing to speculate on exciting global markets, the Forex market plays a critical role.