Foreign Exchange Market Definition

Foreign Exchange Market Definition

This post may contain affiliate links and we may earn a small commission when you click on the link at no additional cost to you. Thank you for your support

The term of the foreign exchange market or Forex market is very popular.  Although not everyone knew exactly what this type of market refers to.

Anyone who wishes to know more about this market needs to learn it from the very basic. And start it by knowing the foreign exchange market definition first.

The foreign exchange market or forex market is the type of market where the participants able to buy, sell, participate and speculates foreign currency.

The participants of this market included individuals, firms, commercial companies, banks, central banks, hedge funds, retail forex brokers and also investment management firms.

This market is not a place but a system. The market is huge and very liquid.

People say that the Forex market is the largest and the most efficient financial market around the world.

The transaction is not limited to several pairs of currencies only. But it covers a large number of foreign currencies from all over the world.

Foreign Exchange Market Type

The classification of the foreign exchange market type is based on the time of the transaction that took place. Based on this aspect, there are two types of the market and they are:

Spot Market

Spot market refers to the transaction where the whole thing takes place immediately, usually in one or two business days.

Future Market

The future market refers to the type of foreign exchange market where the transaction (sale and purchase) of the currency will take place sometime in the future at a rate that has been agreed upon currently.

Foreign Exchange Market Function

Now, when people already know about foreign exchange market definition and also the types of it, they can learn more about the market function.

There are at least three functions we can perform by and on this market:

Credit Function

Foreign trade requires credit to complete the trading process. International payment usually involved a bill of exchange with three months maturity period.

In this period, credit is required to make sure the whole process will complete and foreign exchange marketable to provide this.

Transfer Function

The transfer functions, which involved different parties and countries that involved the transactions are performed through different instruments such as telephone transfer and bill of foreign exchange

Hedging Function

The agreement between buyer and seller to do a transaction at a specific date in the future at current prices called hedging.

Both parties can make an agreement on the foreign exchange market. And minimize the loss from the change in the value of the currency.

Final Thoughts

The foreign exchange market is a liquid market. It means that the value of a currency pair may change in a short amount of time. This makes this market very profitable. Thus it makes many people want to be a trader in the foreign exchange market.

There are many other aspects of this market that people need to learn about if they want to be a forex trader.

They have to learn the types of forex charts and how to read it, and also how to choose a forex broker. They must know about the most popular and the best pair of currency to trade with.

At last, there is much more to learn to become a forex trader.