Participants In The Forex Market

There are four classes of participants in the forex market. Those classes are outlined below.

Governments and central banks. The largest and most influential participants in the forex market are governments and central banks. Central banks are typically either a part of the government or are a quasi-governmental institution -- meaning they are partially private, while still subject to a greater degree of scrutiny and regulation than fully private entities. The Federal Reserve, the central bank of the United States, is one such example of a quasi-governmental institution, as it sets policy on its own, but its head is appointed by the President of the United States.

Governments and central banks are the starting point of money; they are responsible for printing currency, and are in charge of regulating its supply. Their ability to control the supply of money gives them immense influence over the value of currency.

Banks. Banks constitute the next most influential group of participants in the forex market. These financial institutions lend money and also act as "market makers" -- the intermediary that links buyers and sellers in a foreign exchange transaction. Local banks, such as the neighborhood bank that many individuals may go to, operate in the forex market on a very small level, but larger banks often trade a significant amount on a daily basis. Their trading volume gives them influence over the value of currency.

Hedgers. Hedgers are participants who use the forex market to reduce the risk they are exposed to because of fluctuations in exchange rates. For instance, a company that imports raw materials to make goods may find that its costs rise if its native currency (meaning the currency it uses to import raw materials) falls in value. To hedge against this risk -- meaning to protect itself -- the company may enter a foreign exchange trade that allows it to profit from its falling currency. Exchange rate risk is an increasingly important factor in our interconnected world, especially for multinational corporations. As a result, hedgers can exert influence over the value of currencies.

Speculators. The latest class of forex market participants are speculators -- those who exchange currencies solely with the intent of profiting from exchange rate movements, in much the same way that stock market traders profit from fluctuations in stock prices. Hedge funds, large investment firms known for their aggressive strategies, are the largest group of speculators. With the advent of the Internet and online trading, though, opportunities for individual speculators have increased as well. These individuals trade online in much the same way that individual stock traders do.

Collectively, these four classes of participants constitute all the players in the forex market. Their varying objectives and the roles they play ultimately determine the value of the currencies that all people use.

Simon Parth has been an active forex trader since 2002. He is the co-founder of InformedTrades.com, a community dedicated to creating a comprehensive free online school for traders.