Forex is a "place" where currencies are traded. Eye important to most people around the world, whether they realize it or not, because the currency must be exchanged for foreign trade and business. If you live in the United States and want to buy cheese from France, you or the company you buy from having to pay French cheese for the cheese in euros (EUR). This means that US importers have to exchange an equal value with the US dollar (USD) into euro. The same thing applies to travel. A French tourist in Egypt can not pay in euros to see the pyramids because it is not a locally accepted currency. Thus, travelers should exchange euros for the local currency, in this case the Egyptian pound, using the current exchange rate.
The need for currency exchange is the main reason why the forex market is the largest, most liquid financial market in the world. It dwarfs other markets in size, even the stock market, with an average trading value of approximately US $ 2,000 billion per day. (Total volume change over time, but as August 2012, the Bank for International Settlements (BIS) reported that the forex market traded more than US $ 4.9 trillion per day.)
One of the unique aspects of the international market is that there is no central market for foreign exchange. In contrast, currency trading is done electronically over-the-counter (OTC), which means that all transactions take place via computer networks between traders around the world, rather than a centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the financial centers of the main London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - in almost every zone time. This means that when the trading day in the US ends, the forex market started again in Tokyo and Hong Kong. Thus, the forex market can be very active at any time of the day, with bidding prices change constantly.
Spot Market and Forward and Futures Markets
Actually there are three ways that institutions, corporations and individuals trading forex: the spot market, forward market and the futures market. Forex trading in the spot market has always been the largest market for an "underlying" real asset that the forward and futures markets based on. In the past, the futures market is the most popular place for traders because it is available to individual investors for a long period of time. However, with the advent of electronic trading, the spot market has witnessed a huge surge in activity and now exceeds the futures market as a trading market of choice for individual investors and speculators. When people refer to the forex market, they are usually referring to the spot market. Forward and futures markets tend to be more popular with companies who need to hedge their foreign exchange risk for a specific date in the future.
What the spot market?
More specifically, the spot market where currencies are bought and sold in accordance with the current price. That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, sentiment towards the political situation is ongoing (local and international), as well as perceptions of the future performance of one currency against another. When the deal is completed, it is known as "spot transactions". This is a bilateral transaction where one party provides the agreed amount of currency to the counter and receive a certain amount of another currency at an agreed exchange rate. Once the position is closed, payment is made in cash. Although the spot market is generally known as one associated with the transaction in the present (not future), this trade actually took two days to complete.
Any forward and futures markets?
Unlike the spot market, forward and futures markets do not trade actual currency. Instead they deal with contracts that represent claims to a particular type of currency, a certain price per unit and the future for completion.
In the forward market, contracts are bought and sold OTC between the two parties, which determines the terms of agreement between them.
In the futures market, futures contracts are bought and sold based on size and standard settlement date of the public commodity markets, such as the Chicago Mercantile Exchange. In the US, the National Futures Association regulate futures markets. Futures contracts have specific details, including the number of units traded, delivery date and settlement, and the increase in the minimum price that can not be adjusted. The exchange acts as a partner to merchants, giving permission and settlements.
Both types of binding contracts and are usually settled in cash on the relevant exchange at the time of expiration, although the contract can also be bought and sold before they expire. Forward and futures markets may offer protection against the risk when trading currencies. Typically, these companies are large international use this market to hedge against exchange rate fluctuations in the future, but speculators are taking part in this market as well. (For a more in-depth introduction to the future, see Futures Fundamentals.)
Note that you will see the term: FX, forex, foreign exchange market and the currency market. These terms are synonymous and all refer to the forex market.