The foreign exchange market (forex) is the trading market for almost any business, including investors in retail, newbies in trading, household names in hedge funding, and banks.
Without a doubt, the forex market is the single largest financial market on a global scale. In 2019 alone, the Bank of International Settlements reported $6.6 trillion that fell in the daily turnover of OTC in the forex market.
There’s a pool of players in the forex market, with central and commercial banks and hedge funds being the most prominent ones. But, this is not to be taken that other business entities or individuals can’t join.
Continue reading this article to uncover the usual participants in forex trading.
Who Can Partake in Forex Trading?
Every business entity in the forex market has its own goals and motives. Hedge funding might be the most common reason companies trade on the forex market daily, and yet the fact remains that many use speculative trading to base their actions.
Corporations and commercial banks are some of the key players in this market. However, individuals can also participate. Following is a list of all participants in the forex market.
Although the number of investors in forex is not nearly close to those of hedge funds and commercial banks, an individual investor is still a notable participant.
Following the financial crisis of 2008, many families in the US turned the tables and started learning forex trading online. This led to the last Survey of Consumer Finances data showing that nearly 53% of US families have become stock owners.
Individual investors, also known as retail investors, are becoming more present in the foreign exchange market due to the popularity of trading.
They establish their currency trades on several factors. These include the parity of the interest rates, the monetary policy anticipations, and inflation rates, along with the technical aspects of forex trading like technical indicators, price schemes, support, etc.
Commercial & Investment Banks
The big names in the banking sector are the most frequent participants in the forex market. Although these banks mainly trade in their names, it is not strange for them to act as proxies on behalf of their clients.
Commercial and investment banks are the driving force behind the liquidity of the forex exchange and are considered the spine of the financial market.
These entities know pretty much everything about forex. Their professional structure, the capital at their disposal, and the overall knowledge of the market make them the MVP in forex.
Government & Central Banks
When a domestic currency goes through a rut, the country’s central bank becomes a notable participant in the forex market. Central banks, acting as the government’s financial representative, participate in the forex market with the intent to manage the foreign currency resources, yet sometimes they take on a speculative role.
If a central bank, aka the financial representative of a government, becomes involved in the forex market, it is to increase the economy’s competitiveness or stabilize it.
One of the essential responsibilities of central banks is to fix the price of domestic currencies on forex.
Hedge Funds & Investment Managers
The foreign exchange market is mainly dominated by hedge funds, with global macro and currency funds as the most notable ones. Macro funds tend to be part of many global markets, but the currency funds focus on forex trades.
On the other hand, investment managers are prominent in trading currencies for multiple accounts, including endowments, pension funds, and foundations.
Companies in diverse international markets in the import-export sector usually trade on forex to limit or avoid the risk linked to foreign currency exchanges.
For example, if a French company exports goods to Canada, it must mind the currency exchange translations that will underline the sale. The Canadian company that received the goods must pay the French company in euros, not Canadian dollars.
Entering the forex market as a speculator means you’re in it to make a profit. Speculators buy and sell currencies concentrated on the fluctuation of the prices.
Individuals or companies can act as speculators – there have been cases of commercial or central banks acting as speculators to gain profit. Since banks are the savviest players in the financial market, they have the upper hand in speculating currency fluctuations.
The forex market has witnessed a boom of expansion since more and more business parties are becoming attracted to financial gains.
Central and commercial banks, international companies, retail investors, and even individual speculators are part of the massive financial market. For a good reason – it encourages profits generally caused by imbalanced global economies and fluctuating foreign currency rates.