Foreign Exchange (Forex)
What It Is:
Foreign Exchange (FOREX) refers to the foreign exchange market. It is the over-the-counter market in which the foreign currencies of the world are traded. It is considered the largest and most liquid market in the world.
How It Works/Example:
Foreign Exchange has no centralized market. Instead, a foreign exchange market exists wherever the trade of two foreign currencies are taking place. It is open 24 hours a day, five days a week. This foreign exchange market exists to ease investment and trade. The primary trading centers are London, Paris, New York, Tokyo, Zurich, Frankfurt, Sydney, and Singapore. All levels of traders, from central banks to speculators, trade currencies with one another.
Why It Matters:
Without this mechanism in place, foreign trade and investment would be impeded. Since many currencies abound along with a few major players like the U.S. dollar, the British pound, and the euro, this apparatus provides a clearinghouse to trade those major currencies.