Definition of Foreign Exchange

The foreign exchange market plays a crucial role in global trade. Institutions such as banks can buy and sell currencies like the euro or the yuan. As a result, international trading and investments run smoothly.

Facts
The market is different from other exchanges in that it has no central location. Instead, it consists of traders who buy and sell currencies from their computers.

Function
The main purpose of the foreign exchange market is to encourage international investment and trade. This market exchanges one currency into another currency. For example, when European countries exports products and services to the United States, the U.S. can pay for these items in euros, rather than dollars.

Types
The foreign exchange market is one of the largest global markets. Some of the players that trade in this market are central banks, speculators and corporations. Individuals, known as retail traders, make up a small part of this market. They cannot trade directly, but can conduct this task through a broker or bank.

Considerations
The foreign exchange market is broken down into levels when it comes to accessing prices. Not all traders will see the same price. The inter-banks, which are very large investment banking firms, have the best access to prices because they trade in very large volumes. As a result, they have access to the best spreads. The spread is the difference between the bid and the asking price.