One of the first things you might wonder is, who really makes up the market? There are lots of different players, who interact with the market for different reasons.
This discussion will mainly be focused on Forex market players, but the same generally applies to most securities.
These are some of the largest players involved in Forex transactions. A huge amount of transaction deals take place between banks, known as the inter-bank market. These transactions are generally on behalf of customers, although can be for themselves.
Companies take part in the forex market for the purpose of doing business. For instance, a British company has to exchange pounds for euros when purchasing equipment from a company based in Europe.
Companies also use the markets to hedge their business risk. This involves buying/selling the currency of a foreign country they are doing business in to ’lock-in’ a specific transaction rate for the future.
Example: If a British company wants to import steel from the US, it would have to pay in dollars. If the price of the pound falls against the dollar before the payment is made, the company would end up paying more than the original agreement. As such, the company could enter a contract to lock in the exchange rate and eliminate the risk of dealing in dollars.
Examples are the European Central Bank, the Bank of England and the Federal Reserve. Like companies, governments utilise the forex market to do business, such as making international trade payments and handling foreign exchange reserves.
Speculators are in the market for one sole purpose: to take advantage of price fluctuations and make money. Speculators include everything from fat pocketed hedge funds, to small scale traders and everything in-between.
It is important to be aware of the different market players and that they are all participating for different reasons. This is partly what generates market inefficiency, which we will teach you how to utilise to make money out of the market.