Foreign exchange refers to the act of converting the currency of one country to the currency of another. Today, foreign exchange — also called forex or FX — generally refers to dealing with international currencies. It can refer to trading currencies, where investors buy and sell different currencies to make a profit, like a stock trader does with stocks, or applying simple exchanges of currencies for personal or business use. Forex can be particularly important if you live or have family overseas, invest in a foreign country or pay clients or suppliers worldwide.
How does a foreign exchange work?
Currencies are traded regularly through electronic communications networks (ECNs) and by phone worldwide — to the tune of more than $5 trillion daily. The forex market is the largest financial market in the world, encompassing companies investing in foreign companies or services, tourists exchanging their home currency for trips around the world and experts looking to leverage rates to turn a profit.
Factors that affect how a country’s currency trades against another include:
Global socio-political atmosphere
Prices and inflation rates
Foreign trade and monetary policy
Export-to-import price ratios
Less-aggressive factors are consumer confidence about the economy and economic growth, the strength of other currencies, investor speculation and day-to-day news about natural disasters, elections and new government policies.
Converting currency through foreign exchange
You have many options when it comes to converting currencies, and each appeals to a specific situation:
Banks. Nearly all banks offer a selection of currencies that allow you to convert funds. But more exotic currencies may not be available on short notice. Banks typically charge high conversion fees and offer weak exchange rates.
International money transfer specialists. More companies are popping up in the US to offer a full range of forex services with larger varieties of available currencies. These companies typically offer transfer services that allow you to send your money worldwide with competitive exchange rates and low fees, sometimes through peer-to-peer trading.
Foreign exchange kiosks and post offices. Usually found within airports, kiosks run by such companies as Travelex or banks offer foreign exchange services. Your post office may also convert funds to other currencies. Compare the rates and fees you’ll be charged before converting with these services.
Credit and debit cards. Many credit and debit cards automatically convert US dollars into foreign currencies when you’re overseas. You’ll typically pay foreign transaction and ATM withdrawal fees, whereas cards designed for international travel may allow you to lock in currencies at specific rates and waive foreign transaction fees.
Compare foreign exchange products
Our table lets you compare the services you can use to send money abroad. Compare services on transfer speeds and fees, then click Go to site when you're ready to send.
Conversion fees. Most banks and exchange companies will charge a fee for converting currencies. Because these fees can vary wildly, find out whether the provider charges a percentage of the total sale amount when buying or a flat fee, which can be as much as $10 or more.
Exchange rates. Nearly all providers skew exchange rates for a profit. Some add a large margin to the mid-market rate, while more competitive providers will minimize this margin. Exercise your due diligence before going with one provider, and you’ll be sure to get more value out of your exchange. Look for the smallest margin between the mid-market rate and the rate you’re offered.
Processing times. Depending on why you’re converting money and how much, how long it takes for your transaction to complete matters. Many companies provide priority services for an extra fee, so be sure to factor this fee into your comparison.
Processing options. You might need to conduct regular transactions if you’re making overseas mortgage payments. If so, add the availability of recurring exchanges to your comparison of providers.
Extras. A provider may offer one-on-one services to business clients along with the ability to negotiate the rate. You might also be able to take advantage of forex market analysis with your foreign exchange provider.
While some providers offer competitive rates but higher fees, others could offer lower fees but weaker rates. Weigh rates and fees against convenience and compare at least three providers — banks and online specialists — before deciding on a service.
Hedge your options to save on currency exchange
Many foreign exchange providers offer flexible tools that can insulate you against rapidly fluctuating market exchange rates — and help you better protect when it’s best to complete your exchange. These hedging and planning tools include:
Forward contracts. If the current exchange rate is in your favor, a forward contract could allow you to lock it in for future transaction, sometimes as far as two years into the future.
Limit orders. Specify your ideal exchange rate with a limit order, and when the market reaches that rate, it’s locked in for you to complete your transaction.
Stop-loss orders. A stop-loss order is nearly the opposite of a limit order: Instead of specifying an ideal rate, you indicate a rate you want to avoid dropping below. If the market falls to that rate, your currency is purchased automatically, giving you the potential to profit when the market rises again.
Recurring exchanges. If you need to send regular cross-border transfers — weekly, monthly or quarterly payments to the same recipient — many services will allow you to lock in more favorable exchange rates with lower fees.
Bottom line
Understanding how foreign exchange works could help you save money when sending money internationally by giving you more tools to take advantage of. Foreign exchange is crucial to a global economy, and on a personal level, can be crucial to supporting loved ones far away.
Frequently asked forex questions
How long does it take to convert and transfer money across the globe?
Conversion and transfer speeds depend on the currency you’re exchanging and the service you use. You can typically exchange or transfer major currencies in a few days, while more exotic currencies can take up to four days or more.
What is a spot rate?
Many exchange services advertise what’s called a spot rate. This is the value of the currency you’re buying or selling at that moment in time, different from the “forward rate” you’ll receive when actually initiating your transaction.
How do I know if my foreign exchange service is safe?
Ensure that your provider is regulated by the Commodity Futures Trading Commission (CFTC) and employs online security systems to protect your personal and financial details. If you’re carrying out a money transfer, confirm the service holds your funds in client accounts separate from the company’s corporate accounts.
How safe are foreign exchange money transfers?
When processed through a reputable bank or company, your funds are safely tracked until in the hands of your recipient. And if you’re sending money internationally, federal protections are in place that require banks, credit unions and money transfer companies to, for example, disclose all fees up front and give you 30 minutes to cancel a transfer, assuming it hasn’t yet been picked up or deposited.
Whether products shown are available to you is subject to individual provider sole approval and discretion in accordance with the eligibility criteria and T&Cs on the provider website.
Zak Killermann was a technical publisher at Finder who specialised in currencies and investing. Zak’s expertise was in breaking down technical finance concepts into approachable, digestible nuggets of information.
How do you know if your international money transfer made it safely? Learn how to track or cancel, and find out what your rights are when it comes to sending money.
From bank transfers to specialist money transfer companies, there are several options available when you need to transfer money overseas from your bank account.
If you need to transfer money overseas using your credit card, you can do so via your bank, MoneyGram, Western Union and PayPal. This can be useful in emergency situations, but credit card transfers are usually not a cost-effective option.
How likely would you be to recommend finder to a friend or colleague?
0
1
2
3
4
5
6
7
8
9
10
Very UnlikelyExtremely Likely
Required
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Advertiser Disclosure
finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which finder.com receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. finder.com compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
