Forex is a growing market with more and more participants yearly. Forex or foreign exchange is the trading of currencies and it has grown into a market of around $5 trillion daily. If you are new to the concept of forex trading, you might be wondering who exactly is involved in this market. Here we will look at the main participants in the market to gain some understanding of why different people or organizations are involved in the market.
Consumers are not the types of forex traders you may think of as they don’t even realize themselves that they are involved in the forex market. These are people who make purchases of goods or services while in a foreign location. Travelers must exchange their currency for the local currency to pay for transport, accommodation, shopping and more. This is true for exchanging and using cash, as well as for using credit cards to make payments. While these individual transactions may seem small, the volume of people travelling the world results in a high volume of transactions daily.
Businesses are also involved in forex trading due to the transactions they make overseas. These include paying for services overseas and purchasing or selling products or services. When trading goods and services outside their jurisdiction, companies are converting currencies. A business with high cash flow and revenue may trade currencies on a day to day basis to ensure they have enough liquidity in cash flow available at any moment to buy products. Many businesses use hedging strategies to try to avoid losses due to currency market volatility, rather converting currency in bulk when the exchange rate is beneficial to them.
The largest volume of currency traded is between banks. The interbank market sees banks of all sizes and from all round the world trading currency with each other. Banks also facilitate forex trading for their customers. Central banks are particularly important players in the forex market as the interest rate policies of central banks influence currency rates. Central banks are also responsible for the exchange rate regime (floating fixed and pegged regimes) for currency trading in the open market and their actions are used to stabilize or increase the competitiveness of a specific nation’s economy.
People who are actively involved in forex trading are known as investors or speculators. They trade on the forex market through an online forex platform or a forex broker. The volume of trades made by a retail investor is very small compared to banks, but this form of trading has grown significantly in recent years. Retail investors base their trading on a range of fundamental and technical factors.
Forex players trade currencies for very different reasons. As an individual trader, it is worthwhile to know who the players are in the forex trading market. Understanding who trades in currency and why may help you as an investor as you see how forex players impact the global economy.