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Whether you know it or not, you participate in some kind of market on a daily basis. But if you want to be an active and conscious participant, it requires knowing the market exchange definition and more of an in-depth understanding of its operating elements. Market exchange is the central place where sellers and buyers meet where reliable representative prices are ensured. Unlike the traditional market, market exchange works on a much broader scope and deals with contracts worth vast sums of money. That is why it is regulated by multiple authorities; also you are not allowed to purchase anything directly unless you are a bank, all operations have to be carried out through a broker. Only certain people are allowed to join and that imposes a certain degree of regulation on the market, makes it less likely that people will fail trades. Even then transactions stay under the supervision of a regulator to certify that they are honest and transparent.

The main job of an exchange market is straightforward - to match as many buy and sell orders as possible. Most of the orders are done electronically through a so-called order book because it is fast, cost-efficient and completely anonymous. If you are trading small, it makes no difference, but if you are a big player, anonymity is quite important, otherwise, people will start to move prices against you. Some are done in a slightly more old-fashioned way involving market makers. However, even when market makers are involved, market exchange is supposed to have an electronic system that allows you to place the trade. Another thing exchange market does is offer a form of guarantee because whoever your counterparty is, you need to be sure that a trade is going to end well for you. The contract means that if the buyer does not pay effectively or the seller does not deliver having agreed to, it will be taken care of.  As someone using the exchange, you can be confident that deals will be honored.


There are multiple types of exchange markets all over the world, which significantly vary in sizes. The biggest ones are New York and London marketplaces, which have seen many generations of traders and investors. Regardless of the size, they provide relatively the same services so there is no need to compare markets in different countries. All of them can be classified into various categories depending on offered products, organization principles, participants and roles in international trading. As for the type of offered products, there are stock, commodities and currency exchanges.

• Stock exchange is, first and foremost, a platform to attract investment where main trading assets are company shares. Other than that, you can also find such financial instruments as debt securities. Having started in the coffeehouses and since evolved and this large system, it serves all the purposes mentioned before but in the context of share trading. The stock exchange has an arrangement to allow for the settlement of shares and in a nutshell, there is an organization that copes with the final stages of a share transaction. This way, the exchange takes care of most of administration issues.
• As the name suggests, commodities exchange is meant for trading standardized commodity contracts. The list includes everything from agricultural products to precious metals and oil; the biggest ones provide the wider ranges. For example, Chicago Board of Trade offers agricultural products, gold, silver and securities; Chicago Mercantile Exchange does not only trade products but securities and currencies.
• Currency exchange manages how basic infrastructure elements of the currency market work: trading (mechanism of counterparty search), clearing and payment systems (mechanism of trade execution). In most countries, currency exchange participants are credit institutions but it can also be other financial organization such as insurance and pension funds, investment companies working through brokerage firms. The main operations conducted here are buying and selling forward or by means of spotting and swapping.

There are public, private and mixed organization principles of the market exchange. The first one is run by a government and poses being in the trade register as the main condition. These are widespread in the Continental Europe. As for the USA or the UK, there are multiple private exchanges with a limited number of participants; you would need a certificate to become one. Western Europe has most of the mixed exchanges.

Classification in regards to participants divides the markets into open and closed. Open exchange markets can be completely open, meaning buyers and sellers trade among each other and relatively open when buyers and sellers are represented by brokers and dealers as middlemen. These days, most exchange markets belong to the closed type so instead of buyers and sellers making trades on their own, exchange members serve as mediators. This especially applies to currency exchange where most of the transactions are done through a third person.


National currencies are vitally important to the way modern economies operate. We buy goods in the seller's currency by acquiring some local currency. If you use a foreign ATM, you will receive some cash that is not equal to the amount of money you had to give up; what you experienced is the exchange rate. The definition of exchange rate is the value of one country's currency expressed in terms of another country's currency. Similar to the price of most things, exchange rate is determined in the marketplace which is known as foreign exchange market.

The demand and the supply of a currency determine the value. Two things can happen depending on how the demand or the supply change. If the demand of a currency rises or the supply decreases and all else is held constant, we will see an appreciation of that currency (an increase in value). On the other hand, if the demand falls or the supply increases and all else is held equal, it will lead to a decrease in the foreign exchange market known as a depreciation. Thus, appreciation and depreciation refer to a change in the value of a currency against another currency.

To better understand the notions of demand and supply, let's examine the following example. Who in Europe would demand US dollars? First of all, any European who wishes to buy an American product must obtain US dollars in order to do so. Even if a person pays in their own currency, this transaction ultimately requires an exchange from euros to dollars. Therefore, the more European consumers wish to buy American products, the greater the demand for dollars will be. However, they are not the only demanders for US dollars and likewise, American consumers are not the only demanders for euros. In addition to the purchase of goods and services, investors who wish to invest in foreign assets also demand foreign currencies. The third major demander of foreign currency is governments and central banks, the latter may demand foreign currency in order to acquire foreign assets of their own.

Who supplies currency in the foreign exchange? Foreign consumers who are buying domestic goods supply their currency in order to acquire the domestic currency. Foreign investors who invest in domestic assets put their money into local banks. Thirdly, it is foreign governments and central banks which hold on to foreign assets (goods or services). The transactions that take place between these stakeholders across national borders result in a flow into and out of exchange markets at all times.

• If a government adopts a floating exchange rate, it means the the value of a currency is determined freely by changes in demand and supply. In other words, there is no government intervention and it makes no effort to appreciate or depreciate its own currency.
• A managed system is the one where the value of a currency is closely managed by government and central bank policy. They set a range of exchange rates within which the currency may fluctuate. If there were downward pressure on a currencies exchange rate below that desired range, the government or the central bank could intervene to revalue or appreciate the currency.
• The third system a country might adopt in order to determine its exchange rate is a fixed or a pegged rate system. In such a system a government actually pegs the value of its currency against another, usually against its major trading partner.