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What is Meant by Forex or Foreign Exchange?
By Donald Saunders

Most countries have their own national currency such as the US dollar, the UK pound, the Japanese yen and the Thailand baht.

These are of course necessary for making payments for goods and services within each country's borders.

Increased Trading

However, in a world where we travel more and where countries increasingly trading with one another, foreign currency is required to pay for cross-border sales of goods and services.

This means there must be some mechanism in place to provide access to foreign currencies, so that payments can be made in a form that is acceptable to the seller of the products and services. Thus the need for a foreign exchange market (forex market) was created.

One Currency For Another

In its simplest form foreign exchange refers to money which is denominated in a currency other than your own. For example, if an individual exchanges his US dollars currency for the UK pounds currency of England then he acquires foreign exchange.

Of course, we often think of foreign exchange in terms of tourism. Most of us have traveled abroad and exchanged currency on arrival at our destination to pay hotel and restaurant bills, taxi fares, sightseeing tours and shopping.

However, foreign exchange, also, applies equally to larger transactions even hundreds of millions of US dollars....

Cash - Credit - Checks

...Broadly speaking, in the US any money which is denominated in the currency of another nation would be termed as foreign exchange.

It is important to remember that we are not necessarily talking here about cash. Foreign exchange can also consist of money which is available through a line of credit (such as a credit card) or traveler's checks.

In other words, we still talk about foreign exchange for any negotiable instrument which is denominated in a currency other than the US dollar.

Banks - Corporations

When we talk, however, about the foreign exchange market we are not really concerned with the exchange of small sums of currency by tourists. We are looking at foreign currency which is exchanged between an international network of foreign exchange dealers.

Transactions are normally exchanged in what most of us would see as being very large sums of money. For example, one of the main players in foreign currency trading is major banks. Here in the USA a bank might need Japanese yen. The US bank deposits several million US dollars with a Japanese bank in exchange for yen.

Everyday Investors

Today an increasing number of small investors are able to participate in the foreign exchange markets. They benefit from the profits to be made as the prices of national currencies rise and fall against one another.

In general, however, the private forex trader does not himself trade in large sums of money. He is able to trade by working through brokers who are major players in the foreign exchange market.

So, buying and selling foreign money to pay for products and services is the meaning of Forex or Foreign Exchange. Large businesses, governments and everyday investors benefit from this international trading.