How Major Players Participate in Forex Trading Market
In contrast to that with the equity market, wherein investors frequently only do trades with institutional investors and many other individual investors, the foreign exchange market, or simply the forex market, has other participants who have completely different reasons for trading compared with traders in the equity market. If you somehow have a plan of venturing into forex trading, identifying and understanding the motivations and the functions of its major participants will be very useful when it comes to decision making.
Provided below are the major players participate in forex trading market.
Banks and Other Available Financial Institutions
One of the largest groups which participate in the foreign exchange market consists of banks and other financial institutions. A lot of individuals who have the need for foreign currency in order to do small-scale businesses and other transactions tend to go to neighborhood banks. But when compared with the volumes of foreign exchange transactions done in the interbank market, individual exchanges or transactions are considered to be minute.
Huge banks do transactions with each other and identify the price of currencies which individual traders view on their trading platforms. Banks do these activities through the interbank market. With the use of electronic brokering systems which are based upon credit, these banks do transactions with one another. Only those banks which have credit relationships with one another can engage in businesses or transactions. The larger a bank is, its credit relationships also increases and thus, it can access a much better pricing for the customers. On the other hand, the smaller a particular bank is, its credit relationships also decreases and so it will have a much lower priority when it comes to the pricing scale.
Generally, banks serve as dealers in a way that they are willing to either buy or sell currencies at their bid or ask price. With the foreign exchange market being a decentralized one, it is fairly not surprising to see that different banks slightly differ in terms of the exchange rates of even similar currencies.
Some of the banks’ largest clients are those businesses which deal with various international transactions. Whether a particular business is buying products or services from a supplier located in another country or whether that business is selling to various international consumers, it will have to face various circumstances such as the unpredictability of fluctuating currencies.
Uncertainty is something which management and investors intensely dislike. The risk that comes with exchanging in the foreign exchange market is considered to be a problem which has to be dealt with by many multinational companies. An option which businesses can choose to take in order to reduce the level of uncertainty and risk involved in forex trading is go to the spot market and then make an instant transaction for their needed foreign currency.
But then again, a business may not always have a sufficient amount of cash on hand in order to pay for spot transactions or they may object to the idea of holding huge foreign currency amounts for a long period of time. Because of this, a lot of businesses usually make use of hedging strategies so that they will be able to lock in a particular rate of exchange for the future. These hedging strategies will also help significantly eliminate any source of exchange rate risk which is involved in that transaction.
Government / Central Banks
Another one of the major players of the foreign exchange market include governments and central banks. In fact, federal governments as well as central banks are considered to be perhaps some of the most prominent and influential parties which participate in currency exchanges or trades.
The central bank is considered to be an extension of the government and thus, carries out its policies together with the government in a number of countries. On the other hand, there are also several governments which believe that having a central bank which is much more independent would be a lot more efficient when it comes to balancing goals such as trying to curb inflation and keeping the interest rates at a low level, which will in turn boost economic growth.
But no matter what extent a central bank’s independence is, government representatives still usually do regular consultations with the representatives of that particular central bank in order to discuss important matters such as monetary policy. For this reason, governments and central banks are typically considered to be on just one page in terms of monetary policies.
Aside from the ones mentioned above, some of the other participants in the foreign exchange market include individuals, investors, speculators and retail forex traders. With the number of advantages presented by trading in the forex market, it is not a surprise why a lot of players want to take part in the market’s various activities.
The forex market is known to be the largest market in the world. But even with this fact at hand, there are fewer currency pairs for you to consider and have your focus on, allowing you to keep track of your options carefully and allowing you not to get lost which is a tendency when evaluating huge numbers of stocks.
Another great thing about the forex market is that it is very easy to access and people can simply participate in the market these days. With the advent of the internet, you may now trade in the foreign exchange market just by having a computer and a reliable internet connection.
The forex market does bring with it a number of great benefits. But in order to be truly successful in this field, it is also equally important to acknowledge the fact that trading in the foreign exchange market also comes with risks. A lot of traders tend to make the common mistake of expecting only to have rewards and ignoring the risks involved. Acknowledging the possibility of both benefits and risks is one great way for you to make wiser decisions, which in turn will give you more chances of succeeding in this undertaking.