The transfer window is the only mandated time of the year when clubs around the world can buy and sell players. The window was put in place for the 2002-03 season by FIFA, the governing body of world soccer, to regulate the transfer market which had gotten out of control in the late 90's. It also sets a uniform period of time for the top European leagues to do their business.
In 2008-09, the European transfer window is the months of July and August and the month of January. Major League Soccer's window is January 15th-April 15th and June 15th-August 15th. The Scandinavian leagues also use a different transfer window to coincide with their schedules.
In the past, players could be sold until almost the end of the season. England had a deadline of the end of March to transfer players to clubs for the final two months of the season.
Definition
First, you need to know what a transfer is. Like American sports which favor the concept of trading, transfers can only occur when the players rights is owned by the team. Players out of contract, or on a free, can sign with clubs at any time in the season, and in fact, FIFA made recent changes to their laws that players could sign after the transfer window closed.
In a transfer, the bidding club offers to pay a certain amount of money for the rights to the player. The player receives a small percentage of the sale, but most of the money goes to the selling club. After the transfer is agreed on, personal terms then have to be agreed. In English, that means the player has to agree with his new club on how much to pay his contract. There are always two parts to a transfer: an agreement between clubs and an agreement between the player and the new club. Players in Europe make much less money per year than their American counterparts, but they can make up some of the money on the transfer fee.
Sometimes, the player will be consulted on which team he is to be sent to, but because of club finances, a club may have to sell a player under duress to the highest bidder to make ends meet. Some players can force a transfer themselves to a club of their desire by pouting in the media or outright declaring they want to play for another team.
In American sports, it is largely frowned upon and against the rules to trade players for money. The Oakland A's of the mid-1970s were the best example of this when their owner Charlie Finley tried to dump their star players for cash, and the transactions were negated by then commissioner Bowie Kuhn. In fact, the only time when players' rights are transferred are when draft picks are traded. This has happened most famously with Eric Lindros in the NHL and John Elway in the NFL when the two players balked at signing with the teams (Quebec and Baltimore respectively) that drafted them. Even in sports where there is a salary cap, teams will trade players for draft picks as compensation.
Rarely in soccer are two players transferred for each other, but in recent years, it has happened more often when the amount of money spent on one player cannot be equated just in cash. In 1999, Lazio sent Christian Vieri to Inter Milan for $32M and midfielder Diego Simeone.
Effects
Players: Originally, this was agreed upon by FIFPro, the international players union, to protect the status of player contracts and avoid free movement of players even when in contract. Ultimately, this makes a player's value fluctuate like it was in a rotisserie league. What a club might have paid for a player will change if said player has a good or bad autumn campaign.
The worst case scenario is when a player knows he is being transferred weeks or months in advance, and the situation hangs over the club until the transfer window opens. This is most relevant for the January window because the team is in season with that controversy over its head. Witness the Fabien Barthez saga at Manchester United where FIFA disallowed his move to Marseille until the January window. United has not suffered, but Barthez has not played a game in recent memory and is in danger of losing his starting spot with France because of a lack of activity.
Coaches: With a limited transfer window, managers (head coaches) now have less time to spend working the phones in their office and can actually spend more time on the field coaching the players they have. For this reason, big-time managers have said it makes their job easier and less time-consuming. The downside for them is that they cannot make a quick fix to the squad when injuries or poor performance drag down their squad. If your team has injuries riddling the side, nothing short of loaned players (from inside your own country) will help to stem the tide.
Clubs: One drawback of this rule is tampering. When clubs have agreed to a transfer for a player weeks before the transfer window opens, you have to wonder how hard the player is playing for his old team. This has been a big problem in Germany where players knew months in advance they were going to Bayern Munich the next season and yet continued to compete against them the season before. As well, teams are quoted in the press saying which players they are going to target during the transfer window
Even though this rule was put into place to stem the tide of escalating salaries and massive movement between clubs, it deprives financially strapped clubs from selling off players when it is best for them. Once the transfer window closes, the club has that salary on its books until the next transfer window opens.
The club also has to think of its fans who can infer from the activity of the club at the deadline whether they mean to be competitive the rest of the season. With January 31 coming four months before the end of the season, clubs also have to judge whether they need to load up on players to push for a European spot or fight off relegation months before that is apparent in the standings.
Also, you need money to make transfers. Teams who are strapped in the first four months of the season won't be able to make any significant moves while some clubs are able to raise money through stock offerings to make a big splash in the transfer market. The power is clearly shifted to the buyer who can dictate the terms of the transfer for less money than they might have paid in the seller's market of the late 1990's.
Q&A
Does this apply to every country or just in Europe?
Every country actually, but because different countries have different playing seasons, FIFA allows them begrudgingly some leeway in adjusting their windows. For instance, Norway and Sweden have longer transfer periods. Countries in southern hemisphere like Australia and New Zealand also have different windows because their seasons start and finish at different points in the season.
The key is to be able to transfer to the intended country when their window is open. For most major European countries, they follow the FIFA guidelines.
There are potential pitfalls from this like in Scotland where players must be registered to play in the Scottish FA Cup there by December 15. That means anyone who signs with a Scottish club after that time can't play in the FA Cup. It's a ridiculous rule that hamstrings clubs, but there is movement afoot to change it.
Can you change clubs inside your own country?
Loan deals are allowed, but actual transfers are done during the window. With some limitations, loan deals can be made permanent outside of the transfer windows.
How does this affect American players?
American players, under contract to Major League Soccer, who want to move permanently or on loan to Europe cannot sign with clubs until January 1st (the 15th if they're under contract to MLS) just like the rest of the world. With Major League Soccer or college seasons ending in the late fall, this leaves nearly six weeks of inactivity for them. For players not under contract, (and any college player falls into that category because the NCAA is not a FIFA-recognized competition), it gives them time to go to Europe and go on trial with a club.
Does MLS follow this transfer window?
With their regular season starting in April, MLS follows a different window that overlaps with the main European window. The League does have deadlines before the season when teams must be at the 24-player limit as well as when contracts become guaranteed. Much like other American sports, it has a trading deadline which freezes the roster until the end of the year. It is rare when the League will buy a player under contract to a club. Most of the players who sign with MLS in the summer months, during the season, do so as free agents which is legal anytime of the year.
