Forex Tutorial for Beginners: Market Participants

The forex market is the biggest market in the world in terms of average daily investment. It is the most liquid market in the world leaving even the stock market behind. Unlike the stock market, the forex market has more market participants. Different participants that operate in the currency market have different reasons to do so. Therefore, it is very important you understand and identify the different market players and their motivation. Here are the main forex market participants that you must know as a beginner. Information taken from

Government and Federal Bank
Governments and federal banks are considered to be of the most influential participants in the foreign exchange market. In many countries, federal banks are considered to be an extension of the government and operate in unison with the government of the country. It is often believed by economists that a more independent central bank will be effective to create a balance between goals, especially in the management of inflation and interest rates within the country. Government representatives discuss the monetary policies with the central bank, irrespective of the level of independence.
Central banks maintain foreign reserves volumes to meet certain set economic goals. It also uses the currency market to adjust the reserve volumes. For example, China has been purchasing the US Treasury bills worth millions of dollars to maintain a targeted exchange rate for Yuan. As the federal banks can spend huge amounts of money, they can create a significant impact on the forex market.

Banks and Financial Institutions
Apart from central banks and governments, banks and other financial institutions are some of the largest market participants. When people need to exchange currency at a smaller level like for travelling abroad, they approach the neighbourhood bank. These individual transactions, however, are very little in comparison to the usual forex market transactions. Banks make currency transactions with another. This transaction is known as interbank transactions. The interbank market is a huge market and holds a significant amount of forex. The interbank transactions are done through electronic brokering systems that are credit based. Banks that have credit relationships with each other can only engage in currency transactions. The larger banks have better credit relationships. Thus, they receive better foreign exchange prices. Banks also act as dealers, buying and selling currencies at bid/ask price. Banks obtain money by exchanging it in the forex market at a higher market. Different banks offer different rates for the same currency because forex is a world-wide market.

International businesses are the biggest clients of the banks and financial institutions. Regardless of the fact that whether the business is buying or selling internationally or not, fluctuations in the currency prices will affect the business.

Managers and shareholders of a business hate uncertainty. Thus, business makes immediate transactions in the spot market to reduce the risk. They often employ hedging strategies to lock the transactions at a specific rate. This is because businesses do not want to hold a large sum for a long period of time or they want to avoid investing too much cash in these transactions.

These are some of the market participants that operate in the foreign exchange market. All of the participants operate in the foreign exchange market for different markets but they shape the market with their activities.
Sign In or Register to comment.