The foreign exchange, or forex, market enables the global trading and exchange of currencies. The foreign exchange market is considered the largest trading market in the world, handling trillions of dollars in daily trades. Participants include banks, central banks, large companies, investment firms, hedge funds, retail brokers, and individuals.

Forex is traded in over-the-counter (OTC) markets globally, rather than trading on exchanges like stocks and derivative securities. In other words, there is not a centralized exchange for forex trading. Forex brokers facilitate trades and act as market makers. The forex market is open 24 hours per day, 5 days per week.

Currencies traded on the forex markets are expressed as pairs. There will be bid and ask prices associated with each currency pair. The difference between the bid and ask prices is known as the bid-ask spread. Each currency pair consists of a “base currency” and a “quote currency.” The currency on the left is the base currency, while the currency on the right is the quote currency. For example, in the GBP/USD currency pair, the British pound is the base currency and the U.S. dollar is the quote currency. The exchange rate represents the amount of the quote currency that is required to purchase 1 unit of the base currency.

The most popular currency traded in forex markets is the U.S. dollar (USD). Other frequently traded currencies include the euro (EUR), Japanese yen (JPY), British pound (GBP), Canadian dollar (CAD), and the Swiss franc (CHF).

There is a large interbank forex trading market. Large investment banks trade foreign currencies in order to hedge their balance sheet and to trade currencies on behalf of clients. The interbank rate for foreign currency transactions is typically lower than the rate for retail traders. Banks that are particularly active in trading forex include UBS, Deutsche Bank, Citigroup, and HSBC.

The spot forex market uses the current exchange rate to trade foreign currencies. Pricing is determined based on supply and demand. Most daily currency trades occur on the spot market. There is also a forward forex market, in which two parties enter a contract to trade a specified quantity of a currency on a future date at an agreed upon exchange rate. Forward contracts are often used for hedging risk and for speculative investing. Futures forex contracts are similar to forward forex contracts, except the terms of futures contracts tend to be more standardized.

Since forex trading primarily occurs in OTC markets rather than on a regulated exchange, there can be significant variation in the fees and commissions charged by forex brokers. Forex markets are also less regulated compared to other securities markets due to the decentralized nature of OTC trading. Certain aspects of the forex markets are regulated and monitored by several supervisory bodies. In the United States, for example, the Commodities Futures Trading Commission (CFTC) regulates the trading of foreign currency futures contracts. Forex brokers must be registered with the CFTC and the National Futures Association (NFA).