What is Forex?
FOREX - the foreign exchange market or currency market or Forex is the market where one currency is traded for another. This is one of the biggest markets in the world.
Some of the participants in the Forex market simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different countries than they export products in. However, a large part of the market is made up of currency traders, Forex Traders, who speculate on movements in exchange rates, like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates or they try to follow the big economic signals in order to predict the trend.
In the forex market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as expectations on global macroeconomic conditions. Important market news are released publicly so, at least in theory, everyone in the world receives the same news at the same time.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.
Foreign exchange is an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The market operates 24 hours per day throughout the week between individuals with forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Participants can react to news when it breaks, rather than waiting for the market to open.
Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the spread between ask or sell is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the '8' at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.
Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in the example above 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid/ask spread).