WHO TRADES THE FOREX MARKET ?
The market nowadays has changed from what it was in earlier years, with
technological development and the ability to conduct transactions overseas
with more ease; other financial/nonfinancial institutions are able to participate in the FOREX market as well as individual investors and traders.
More than 80 percent of the FOREX market’s overall daily activity
comes from speculation, where transactions occur in a wide range from
commercial banks to individual traders. The main players that take part in
the FOREX market are central banks, individual banks, commercial companies, individual investors, brokers, and traders who jointly interact in the
FOREX market to profit from price fluctuations in exchange rates of currencies by means of buying and selling currency pairs as a speculative
activity. Another reason to enter the FOREX market is to hedge other
investments, such as the trading of goods and services. Finally, a few
traders look to profit on the overnight rollover amounts that are generated
by differences in each currency’s interest rates.
Commercial banks perform large transactions daily for their own benefit and also act as intermediaries for
their customers. Central banks participate as controllers of the money supply of the respective country, with
the aim to help the economy achieve its goals. For example, central banks
can operate in the markets to restore the price stability of the exchange rate,
protect certain price levels, or when specific economic goals need to be
achieved, such as the control of inflation or growth.
Some of the most important central banks are the U.S. central bank (the
Federal Reserve, the Fed), the Bank of Japan, the Bank of England, the
Bank of Canada, the Swiss National Bank, the European Central Bank, and
the Reserve Bank of Australia.
PREPARING YOURSELF ADEQUATELY BEFORE JUMPING INTO THE MARKET
Commercial companies can participate in the FOREX market for speculation; to address the need to exchange foreign currencies in their export,
import, and touristic activities; and also to be able to hedge their exposure
if the home currency is seen as depreciating, avoiding in this way the
effects that price fluctuations could have on company stability.
Specific types of commercial companies are represented by investment
funds or hedge funds, which include all kinds of retirement, arbitrage, and
mutual funds, as well as international investments. These firms hedge and
protect one investment with another and have been entering more and more
into the FOREX scene.
Brokers are intermediaries who allow buyers and sellers of foreign
currency to interact. They obtain their profits through the spread between
the bid and ask prices. As discussed earlier, there are two types of brokers:
market makers and ECNs.
Finally, traders can be individuals or small groups that perform speculative and investment operations for their own account or as money managers
for third persons