Forex, or FX, stands for ‘Foreign Exchange‘, the name for the decentralised over-the-counter market in which currencies are traded. Traded in all global financial centres, the Forex market is the most liquid market in the world, and also the largest, incorporating all of the world’s currencies. It is essential to the world’s economy, not least because it helps facilitate trade and transactions between countries. In this way, the Forex market also has significant political influence, determining the relative value of particular currencies. It is unique amongst financial markets in its longer operating times: 24 hours a day, excepting weekends. It is also considered to be one of the only examples of a market with ‘perfect competition’, that is, a market where no one participants is sufficiently large to have the power to set a homogeneous product’s price.
Investors in Forex tend to enjoy risk, as the market typically require a lot of speculation. Skilled Forex investors know how to conduct thorough research into countries’ economic and political situation, the main factors which bear influence in the direction of its currency value. A country in crisis will typically see its currency crash as trade and investment dampens. Growing economies, by contrast, will enjoy a currency which increases in relative value.
Because the units exchanged are so small, Forex markets often have an extremely high volume of trading, which is still increasing. Preliminary global results from the 2013 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity placed trading in foreign exchange markets at an average of $5.3 trillion per day in April 2013, up from $4 trillion in 2010.
Did you find this Forex definition helpful? Subscribe to our spam-free newsletter to receive regular financial definitions, updates on our latest articles, plus exclusive annotated market reports.