a Beginners Guide to How It Works

• Forex is a global marketplace for trading one currency for another.
• Central banks are also involved in the forex market, buying and selling currencies in order to push the value of their native currency either higher or lower.
• The forex markets offer investors liquidity and 24/7 trading — but they’re highly volatile.
• Visit Insider’s Investing Reference library for more stories.

If you’ve already begun your investing journey, the stock market is a familiar place. But if you’re looking to expand your portfolio and see how else you can strengthen your portfolio, there’s foreign exchange, or forex.

Forex involves trading one currency for another. For example, a person could exchange the US dollar for the Japanese Yen. Forex offers deep

liquidity
and 24/7 trading, so investors have ample opportunities to get involved. 

Understanding forex 

The forex market is a global electronic network of banks, brokers, hedge funds, and other traders. This market is where one currency is traded against the other in an effort to turn a profit. 

Central banks are also involved in the forex market, where they’re responsible for maintaining the value of their countries’ currency. This value is represented as the exchange rate by which it will trade on the open market. 

Market participants can trade in the spot market and also buy and sell derivatives. As a result, they can trade futures, forwards, and swaps.

Investors trade forex in pairs, which list the base currency first and the quote currency second. For example, if someone trades the JPY/USD, the Japanese Yen is the base currency, and the US dollar is the quote currency.