First of all, the difference between foreign exchange market and stock market is that foreign exchange market is global and stock market is local. Secondly, trades on the foreign exchange market are being made between governments, individuals, institutions, banks, whereas stock market generally deal with institutions or individuals or banks. Governments aren’t present in stock markets. Third, in the stock market you are trading stocks or shares that either is replaced by the shares or some other stocks. In case of the foreign exchange markets the only thing traded is currencies.
Foreign exchange was introduced in early 70s of last decade, when Bretton Woods Deal between the nations was introduced. Before that value of foreign currency was solely based on stock of the gold held by every nation. Bretton Woods Deal did away with this, and allowed the countries to set foreign exchange rates, it means one dollar will be worth of sterling pound, on basis of demand & supply.
When the countries trade with one another, through their business and from government to the government basis, they have surplus of currency or deficit in another. Also they try to make up surplus to work out for them just by putting it on the sale to some other countries that have shortage of that currency, where they have deficit in currency, and they buy from the country that has surplus of that foreign currency.
BDSwiss mention that stock markets normally work on same principle, however they have got the fixed hours of trading. In the foreign exchange markets, it takes place all time, throughout a day and night, and 365 days in year. Obviously, as in the stock market, the countries take hit when the currency depreciates, and their need for currency is very high, that other dealing country takes benefit of high demand in market, and marks-up the surplus currency to higher level.
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