There are different players in the foreign exchange market and they are all there for a different reason. At the end of the day, the one reason they all have in common is to speculate on currency values.
Who is Involved in Foreign Exchange Trading and Why?
Companies generally make use of this market to pay for services and goods they obtain from foreign countries. They also use the market to sell their services and goods to foreign countries. A huge part of the trading volume is taken up by companies looking for foreign currency to do transactions in foreign countries.
The interbank system used by this financial market allows for both commercial and speculative trades to be carried out each day. Some of the larger banks trade billions of dollars every day. This trading is sometime carried out on behalf of their clients, however much of the trading is done for the bank’s account.
About 70 to 90 percent of all the forex transactions carried out are for speculation. This means that the individual or the institute that purchased or disposed of the currency does not intend taking delivery of that currency. The transaction was fulfilled with the intention of speculating on the movement in price of that particular currency. Retail speculative traders are a mere dot on the horizon when it comes to the large hedge funds that have billions at their disposal to speculate on currencies.
Central Banks and Governments
Central banks in global countries pay a huge role in the foreign exchange market. By controlling the money supply, interest rates or inflation rate a country can cause a decrease or an increase in its currency value. If there is instability in their currency value, it is possible for them to make use of the large foreign exchange reserves they hold to stabilise the market.
Large investment firms who have management tasks to fulfil for their clients’ investment portfolios make use of the foreign exchange market to undertake foreign securities transactions. For example, if an investment manager decides to purchase foreign securities for one of his client’s investment portfolio, he or she will require foreign currency to make the purchase. However, to complete the transaction, he or she also needs to dispose of the domestic currency.
Retail forex trading is growing on a daily basis, particularly since the introduction of trading platforms and the ease of internet accessibility. These traders have indirect access to the market via a bank or a broker.
There are two types of forex brokers available to retail traders which give them the chance to speculate on the forex market.
Brokers work as your agent by trying to locate the best price and executing the buying and selling on behalf of his or her client. To do this, they often charge a commission over and above the price settled on in the market.
Dealers or market makers act as the third party in retail trading transactions. They quote you a price they are prepared to deal at and gain their profit via the spread which is the variance between the purchase and disposal price.