Foreign currency exchange is a vital transaction that allows for the global economy to continually function. Trading of currencies is particularly important for one country to buy goods and services available in another country. It is also essential for companies and individuals to have foreign currencies so that they can invest in entities found in other countries. They should first get hold of the currency of the country that they will be doing business with. The current norm is that exporters and other players who make their products and services available to overseas clients prefer to be paid either in the currency of their own country or in US dollars, a currency that is globally accepted. For example, when the Philippines, a country that does not have oil reserves, exports oil from Saudi Arabia, it pays Saudi oil companies in American dollars, not in Saudi riyals or Philippine pesos.
All these transactions happen in the foreign currency exchange market, otherwise known as the forex or FX market. This market is where exchange rates or the value of one currency in terms of another is determined. Not to be mistaken as a physical building, the forex market is a global network of foreign currency traders. They are linked together by computers and telephone lines and do not actually report to a headquarters or central office. Majority of FX transactions are done in three trading centers - the United States, the United Kingdom and Japan, with markets in Switzerland, France, Singapore, Hong Kong, Germany and Australia also contributing to the transactions in this market. There is no downtime in this market, as once the Hong Kong and Singapore markets are about to close, the ones in Frankfurt and London are just about to open. Once the European markets are about to call it a day, trading in New York has already began. Once the American markets are going to close, it will be a new day again in Asian markets.
The foreign exchange currency trading market is as extensive as it is fast-paced. Trading is so enormous that it is estimated that if every person were to trade in the forex market, he would be trading at least $200 every day. There are usually four kinds of entities that participate in the FX market - banks that buy and sell currencies with each other and rake up profits in this manner, brokers that charge commissions and act as the go-betweens among banks, central banks that represent the interests of their governments, and customers that require foreign currencies to conduct their business properly.