The forex market has a whole set of players in action all the time. This includes the likes of central banks, commercial banks, corporations, investment institutions, forex brokers, and regular old traders.<\/p>\n
Each of these types of players has a different view on just why they are playing this game. Some need a healthy dose of foreign currency to help keep their business afloat.<\/p>\n
At the same time, others are in it for the profit. Ultimately, these groups coming together is what makes the world’s biggest financial market what it is.<\/p>\n
The Forex market (the foreign exchange market) is basically where currencies are traded.<\/p>\n
Every time you swap your Indian Rupees (INR) for some US Dollars (USD), you are actually taking part in it \u2013 even if you don’t realise it.<\/p>\n
It isn’t a single big building or exchange, but rather a very extensive global network of banks, companies and traders who are all connected electronically.<\/p>\n
Trading goes on 24\/7 (well ,sort of – it runs from Sunday evening till Friday afternoon).<\/p>\n
It is massive too. According to the Bank for International Settlements (BIS), a staggering $9.6 trillion of currency changes hands every day.<\/p>\n
A central bank’s main role to manage a country’s money supply and interest rates.<\/p>\n
We have the Reserve Bank of India (RBI) and the US Federal Reserve as two major examples.<\/p>\n
If the rupee falls too fast, the RBI may sell some of its dollar reserves. This adds dollar supply and can slow the fall.<\/p>\n
Central banks do not trade to earn profit. Their aim is stability.<\/p>\n
Commercial banks are the backbone of the forex market.<\/p>\n
They trade with each other in what is called the interbank market.<\/p>\n
A student pays university fees in Canada.<\/p>\n
The bank converts rupees to Canadian dollars and sends the money abroad.<\/p>\n
Banks handle thousands of such requests daily.<\/p>\n
Businesses need foreign currency to pay for goods and services across borders.<\/p>\n
They are not trying to profit from currency moves. They simply need to complete trade.<\/p>\n
When some importer pays a supplier in another country using foreign currency.<\/p>\n
When an exporter converts their earnings into rupees.<\/p>\n
It is a bit like insurance \u2013 protecting yourself from price changes. A company can basically lock in an exchange rate right now for a payment due later<\/p>\n
Take for example an Indian software exporter who has got some US client from whom they have earned $100,000.<\/p>\n
Right before the payment is due, they might choose to lock in an exchange rate so if the dollar happens to drop just before receiving the payment, it won’t eat into their rupee income.<\/p>\n
These are large organisations that manage big pools of money \u2013 pension funds, mutual funds, hedge funds, etc.<\/p>\n
Buying foreign stocks or bonds needs foreign currency.<\/p>\n
Because they handle huge sums, their trades can move prices. A fund shifting billions into dollars can strengthen the dollar.<\/p>\n
A forex broker is a company that gives individuals access to the forex market through a trading platform.<\/p>\n
It mediates between small traders and the larger market.<\/p>\n
Under Indian law (FEMA and RBI rules), residents can trade only rupee-based currency pairs, such as USD\/INR on recognised exchanges like NSE and BSE.<\/p>\n
The RBI really wants to warn people to be on the lookout for unauthorised online forex platforms.<\/p>\n
So always double check whether a broker is legit before you start trading.<\/p>\n
Retail traders are just individuals who trade currencies with their own money.<\/p>\n
They might be students, professionals or even full-time traders.<\/p>\n
Retail traders are a small part of total volume, commonly estimated at under 10%.<\/p>\n
Most trade small amounts, so a single retail trader cannot move the market.<\/p>\n
Participant<\/strong><\/td>\n| Main Role<\/strong><\/td>\n | Why they Participate<\/strong><\/td>\n | Simple Example<\/strong><\/td>\n<\/tr>\n | Central banks<\/td>\n | Manage money supply and currency stability<\/td>\n | Keep the economy and currency stable<\/td>\n | RBI selling dollars to calm the rupee<\/td>\n<\/tr>\n | Commercial banks<\/td>\n | Provide currency exchange and quotes<\/td>\n | Serve customers and earn from trading<\/td>\n | A bank converting INR to CAD for fees<\/td>\n<\/tr>\n | Corporations<\/td>\n | Pay and receive foreign currency<\/td>\n | Complete trade and reduce currency risk<\/td>\n | An exporter converting USD earnings to INR<\/td>\n<\/tr>\n | Institutional investors<\/td>\n | Invest large funds globally<\/td>\n | Diversify and earn returns<\/td>\n | A fund buying US bonds<\/td>\n<\/tr>\n | Forex brokers<\/td>\n | Connect traders to the market<\/td>\n | Earn spreads and commissions<\/td>\n | A platform executing a trader’s order<\/td>\n<\/tr>\n | Retail traders<\/td>\n | Trade with personal funds<\/td>\n | Seek profit and learn<\/td>\n | A working professional trading a small account<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n | How Forex Participants Affect Currency Prices<\/strong><\/h2>\nDemand and Supply:<\/strong><\/h4>\n<\/li>\n<\/ul>\nInterest Rates:<\/strong><\/h4>\n<\/li>\n<\/ul>\nTrade Flows:<\/strong><\/h4>\n<\/li>\n<\/ul>\nMarket Sentiment:<\/strong><\/h4>\n<\/li>\n<\/ul>\n |