The foreign exchange market is used by banks, investment companies, companies and even individuals who want to either cover themselves against the risk of foreign exchange fluctuations or to speculate in hopes of making a profit. 95% of all forex transactions are purely speculative in nature. Only 5% of all forex transactions result from international companies who need to convert their money back to the company's main operating currency.
Commercial banks are the main participants in the forex market, but their "market share" is slowly shrinking. Currently, 43% of all transactions pass through the interbank market, as opposed to 63% in 1998 and 53% in 2004. In terms of forex trading activity, the main role of banks is to serve as middlemen for the other market participants. Their objective is to make profits through "market making", which means that they offer their clients a "buy" price and a "sell" price.
Institutional investors are the second biggest players. They include investment and insurance companies, pension funds and hedge funds. They participate in forex trading in order to cover their stock, bond and currency portfolios and they represent 30% of all foreign exchange transactions.
Central banks intervene to manage their stock of currency and state money. Their transactions represent 5% to 10% of all forex trading volume. The central banks can also intervene in order to defend their respective currencies and to adjust economic or financial inbalances.
Brokers allow private individuals to access the forex market by transmitting their clients' orders to commercial banks or to trading platforms such as EBS, Reuters Dealing, HotSpot, FXall, etc... They get paid from the spread or by charging a commission on each transaction. Also, there are many brokers that operate as market makers; like commercial banks, they also provide their clients with a buy/sell (bid/ask) price to earn the spread if they are able to find a buyer and seller at the same time. If the market maker doesn't find a buyer and a seller, it will try to profit by covering its client's position on the interbank market.
Multinational companies participate in forex trading in order to convert their money during import or export activities. Their transactions represent approximately 5% of all global forex transactions. Some companies even have their own trading floors, with traders speculating in order to make profits and to reduce the risks related to exchange rate fluctuations.
Private investors/individuals have recently been trading the forex market as well, thanks to the internet, which allows them to have real-time access to currency exchange rates. Today, their transaction volume adds up to over 5% of all forex transactions. Currency trading is now suitable for various investor types, who can now profit, just like the bigger players, by properly applying leverage and money management principles.
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