What is traded on the Foreign Exchange?

The simple answer is money. Forex trading is the simultaneous buying of one currency and the selling of another. Currencies are traded through a broker or dealer. Because you're are not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy, compared to the other countries' economies.

Unlike other financial markets, the Forex market has neither a physical location nor a central exchange. The Forex market is considered an Over-the-Counter or "Interbank" market, due to the fact that the entire market is run electronically, within a network of about 5000 trading institutions such as international banks, central government banks like the US Federal Reserve, and commercial companies and brokers. Major trading centers are located in New York, Tokyo, London, Hong Kong, Singapore, Paris, and Frankfurt, and all trading is by telephone or over the Internet. Businesses use the market to buy and sell products in other countries, but most of the activity on the FOREX is from currency traders who use it to attempt to generate profits from small movements in the market.

The most often traded or 'liquid' currencies are those of countries with stable governments, respected central banks, and low inflation. Today, over 85% of all daily transactions involve trading of the major currencies, including the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night, because the Forex market operates 24 hours a day.