Who are the players in the Forex market? Where do you and I come in? Let’s discuss those questions below.
The interbank market allows for both the majority of commercial Forex transactions and large amounts of speculative trading each day. Some large banks will trade billions of dollars, daily. Sometimes this trading is done on behalf of customers, however much is done by proprietary traders who are trading for the bank’s own account.
Companies need to use the foreign exchange market to pay for goods and services from foreign countries and also to sell goods or services in foreign countries. An important part of the daily Forex market activity comes from companies looking to exchange currency in order to transact in other countries.
Governments / Central banks
A country’s central bank can play an important role in the foreign exchange markets. They can cause an increase or decrease in the value of their nation’s currency by trying to control the money supply, inflation, and (or) interest rates. They can use their substantial foreign exchange reserves to try and stabilize the market.
Somewhere around 70 to 90% of all foreign exchange transactions are speculative in nature. This means, the person or institutions that bought or sold the currency has no plan of actually taking delivery of the currency; instead, the transaction was executed with the sole intention of speculating on the price movement of that particular currency. Retail speculators (you and I) are small cheese compared to the big hedge funds that control and speculate with billions of dollars of equity each day in the currency markets.
If you have ever travelled to a different country and exchanged your money into a different currency at the airport or bank, you have already participated in the foreign currency exchange market.
Investment firms who manage large portfolios for their clients use the Fx market to facilitate transactions in foreign securities. For example, an investment manager controlling an international equity portfolio needs to use the Forex market to purchase and sell several currency pairs in order to pay for foreign securities they want to purchase.
Retail Forex traders
Finally, we come to retail Forex traders (you and I). The retail Forex trading industry is growing every day with the advent of Forex trading platforms and their ease of accessibility on the internet. Retail Forex traders access the market indirectly through a broker like HotForex. Brokers work as an agent for the trader by trying to find the best price in the market and executing on behalf of the customer.
For this, they charge a commission on top of the price obtained in the market. Brokers make money from the spread, which is the difference between the buy and sell price (more on this later).