The forex market is the biggest financial market in the world, and it’s even larger than the stock market. There are more than 100 different kinds of official currencies in the world.
On the other hand, most international forex trades and transactions are done with the use of the US dollar, Japanese yen, the euro, and the British pound.
Other popular currencies for trading include the Canadian dollar, New Zealand dollar, Australian dollar, and Swiss franc.
There are many market players in the forex market. They have different purposes, characteristics, and impacts on the broader market. Check them out below.
Commercial and Investment Banks
The largest volumes of currency is traded in the interbank market, which is where banks of all sizes trade currencies with each other via electronic networks.
Huge banks make up a large chunk of total currency volume trades. Banks facilitate forex transactions for clients and conduct speculative trades from their very own trading desks.
When banks serve as dealers for clients, the bid-ask spread represents the bank’s profits. Speculative currency trades are done to gain some profits on currency movements. To a portfolio, currencies provide great diversification features.
Central banks represent a country’s government, and they are extremely important players in the forex market.
Open market operations and interest rate policies of central banks influence currency rates to a very huge extent.
A central bank is responsible for fixing the price of its local currency on the foreign exchange stage. This refers to the exchange rate regime by which the currency will trade in the open market. Exchange rates may be floating, fixed, or pegged.
Any action taken by the central bank in the forex market is for economic stability. They may also do that to increase the competitiveness of that nation’s economy.
Investment Managers and Hedge Funds
The forex market is also full of portfolio managers, pooled funds, and hedge funds, and they make up the second-largest collection of players in this financial market next to banks and central banks.
Investment managers usually trade currencies for huge accounts like pension funds, foundations, and endowments.
Meanwhile, an investment manager that has an international portfolio will have to buy and sell currencies to trade foreign securities.
They may also make speculative forex trades. Some hedge funds, on the other hand, do speculative currency trades as part of their investment strategies.
Companies that have something to do with importing and exporting perform forex transactions to pay for goods and services.
Companies use forex trading to hedge the risk related to foreign currency conversions. The company may want to purchase one foreign currency in the spot market and enter into a currency swap agreement to acquire another currency in advance of a transaction to decrease their foreign currency risk exposure.
Retail investors make up low volumes of transactions compared to the financial institutions and companies. However, they are growing rapidly in popularity.
Retail investors perform currency trading on a combination of fundamentals and technical factors to come up with profit-gaining strategies.
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