The Foreign Exchange Market is the best way to trade currency around the world. Known by the nickname Forex, more than 100 types of currency are traded each day and more than $3 trillion is exchanged daily. There are plenty of participants in the Forex, including those that serve investors, middle men for currency purchase and companies in need of international funds.
Banks participate in the Forex in order to manage the foreign exchange risks of their bank and their clients, according to Peter Pontikis, who writes for Forex Journal Magazine. They can also speculate in the market. Their main goal is to make profits through direct trade of currency and through managing their clients’ trading positions. This gives the bank access to both the buying and selling interests of their clients.
Brokers in the Forex are the middle men between banks who trade currency on a daily basis. Their role is no different than a trader on the floor of the stock market. Brokers spend their day matching buy and sell orders between clients. Many of their functions are computerized, which means deals are done fast. Banks pay a fee to have these brokers handle their transactions.
Pontikis writes that most developed countries have central banks, whose main role is to maintain the validity of the national currency. Central banks usually monitor and test prices on the Forex, and have a great deal of sway with banks, brokers and other players in the Forex market. The reason? Central banks print the money. For that reason alone, their opinions are always respected and rarely ignored.
When a corporation in the United States makes a purchase in France, that company must find a way to make that purchase in foreign currency. That’s where the Forex comes in. The U.S. corporation uses the market to purchase the foreign currency they need to complete the transaction.
There are two types. The fund managers are money managers who deal in funds that amount to hundreds of millions of dollars. They invest that money across a range of investments and a diverse list of clients, including pensions, individuals and governments. Those who manage hedge funds take bigger risks, as they’re seeking to realize leverage potential and will exploit the use of derivatives, according to Pontikis.