Forex is the international market where currencies are traded. The name is an abbreviation of foreign exchange and refers to currency trading. In this market, different currencies are exchanged against each other, such as the euro against the dollar or the dollar against the Japanese yen.
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The forex market is the largest and most liquid financial market in the world.
Unlike the stock market, forex has no central exchange location. Trading takes place worldwide through banks, financial institutions and trading platforms. Currencies are always traded in pairs, for example EUR/USD. The first currency is the base currency, the second is the quote currency. If the exchange rate of EUR/USD rises, this means the euro is strengthening against the dollar.
The value of currencies is influenced by interest rate differences between countries, economic growth, inflation, political stability and investor expectations. Central banks play an important role, as their interest rate decisions affect the attractiveness of a currency.
Forex trading often takes place with leverage. This means you can open a large position with a relatively small amount of capital. As a result, small price movements can lead to noticeable profits, but also to significant losses. Forex is therefore often seen as a market with high opportunities and high risks.
Short example:
Suppose the EUR/USD exchange rate is 1.10. This means that €1 equals $1.10. You decide to exchange €5,000 into dollars. You receive $5,500.
A week later, the euro rises and the exchange rate is 1.20. If you exchange your $5,500 back into euros, you divide this amount by 1.20. You then receive approximately €4,583.
If the exchange rate instead falls to 1.00, you exchange $5,500 back for €5,500. The difference in the exchange rate therefore directly determines the result of your transaction.
Disclaimer: Investing brings risks. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. Therefore, they are for educational purposes only.