Forex stands for foreign exchange and is to do with the exchange of money across different currencies. Forex is such an important function of the world economy as it enables global trade to take place.

For example, if you want to buy French wine in the UK, you must convert your GBP to Euros to enable this transaction to take place.

The Forex market differs from the stock market because it is open 24/7. There is no one central marketplace and trading takes place “Over the counter” via computer networks and amongst traders.

The values of individual currencies are dictated by demand and circulation mainly and this can be affected by outside events (e.g wars, recession).

The Forex market can be split up into three functions: spots, futures and forwards. Futures and forwards are mainly utilised by large banks and investors to mitigate risk against currency values changing in the future. It is essentially a contract between two parties who agree to send/receive a currency on a specific date at a specific price. Spots is where currencies are traded on their price there and then. As mentioned beforehand, this price is determined by supply and demand.

Trading mostly takes place by commercial and investment banks on behalf of their clients, however, in recent years there has been a large growth in speculative trading from individuals where they trade currencies against each other, not for the purchase of goods, but to try and make a profit. These are the two main reasons someone would trade forex, for speculation and hedging.

The Forex market is regulated to ensure that specific contract details are upheld. The busy responsible for this is the National Futures Association which acts as a counterparty to the trader, providing clearance and settlement services.