FOREX Participants.
FOREX does not trade at a fixed
exchange rate; instead, currencies are traded primarily between
the participants in the market. The broad categories of participants are: consumers,
businesses, investors and speculators, commercial banks, investment
banks and central banks.
Consumers (including visitors of countries, tourists and immigrants), need to exchange currencies when they travel so that they can buy local goods and services. These participants do not have the power to set prices. They just buy and sell according to the prevailing exchange rate. They make up a significant proportion of the volume being traded in the market.
Businesses that import and export goods and services need to exchange currencies to receive or make payments for goods bought or services rendered.
Investors and speculators require currencies to buy and sell investment instruments such as shares, bonds, bank deposits or real estate. Investors and speculators also buy and sell currencies for profit.
Large commercial and investment banks are the price makers. They buy and sell currencies at the bid-and-offer exchange rates that they declare through their foreign exchange dealers.
Commercial banks deal with customers on one end, and with the Interbank or other banks, on the other end. They profit by utilizing the bid-and-offer spread. The bid price is the exchange rate that the buyer is willing to buy and the offer price is the exchange rate at which the seller is willing to sell. The difference is called the bid-offer spread. They also make profits by speculating whether the exchange rate will rise or fall in the future.
Central banks participate in the foreign exchange market in their effective duty as banks for their particular government. They trade currencies not for the intention of making profits but rather to facilitate government monetary policies and to help smooth out the fluctuation of the value of their economy's currency.
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