Thursday, April 25, 2013

The Forex Market Participants

Unlike the Equity Market, where investors often only trade with institutional investors (such as mutual funds) or other individual investors. There are additional participants that trade on the Forex market for entirely different reasons than those on the equity market. Therefore, it is important to identify and understand the functions and motivations of the main players of the Forex market as follows:

Consumers and Travelers
  • Consumers may purchase goods in a foreign country or via the internet with their credit card.
  • The amount consumers pay in the foreign currency will be converted to their home currency on their credit card statement.
  • Travelers must go to a bank or currency exchange bureau to convert one currency (their "home" currency) into another (the "destination" currency) when using cash to pay for good and services in a foreign country.
  • Travelers need to be aware of exchange rates to ensure they receive a fair deal.
  • Businesses often need to convert currencies when they conduct trade outside their home country. 
  • Large companies need to convert huge amounts of currency; a multinational company such as General Electric (GE) for instance, converts tens of billions of dollars each year.
Investors and Speculators

  • Investors and speculators require currency exchange whenever they deal in any foreign investment, be it equities, bonds, bank deposits, or real estate.
  • Investors and speculators also trade currencies in an attempt to benefit from movements in the currency exchange markets.

Commercial and Investment Banks
  • Commercial and investment banks trade currencies as a service to their commercial banking, deposit, and lending customers.
  • These institutions also participate in the currency market for hedging and speculative purposes.
Governments and Central Banks
  • Governments and central banks trade currencies to improve economic conditions or to intervene in an attempt to adjust economic or financial imbalances.
  • Because they are non-profit, governments and central banks do not trade with the intention of earning a profit, but because they tend to trade on a long-term basis, it is not unusual for some trades to earn revenue.  

Benefits of Forex Trading & Market Participant 
  • The Forex market is highly liquid, often exceeding $4 trillion USD a day in total trading. 
  • A Spot Forex trade is a contract to trade a given amount of a currency pair with a market-maker, at the current buy / sell price (i.e. the spot rate). 
  • Most Forex dealers allow the use of margin-based leverage. A leverage ratio of 30:1 means that for every thirty dollars you commit to a trade, you must have one dollar in your account. 
  • If your trade loses money and you do not have sufficient money in your account to meet the ratio, you could receive a margin call
  • You should trade with risk capital only. 
  • Deal only with Forex brokers that are members of, and remain in good standing with, a recognized financial regulator.

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