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Forex Capital Markets

By: EconomyWatch Date: 23 July 2009

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Earlier only banks could execute foreign currency transactions. Over the last few years, various financial institutions, including brokers and funds, have forayed into the forex capital markets. The number of retail traders grew significantly with the rising popularity of the Internet. Individual investors trade in currencies from across the globe in the 24-hour forex capital markets.

Forex Capital Market Participants

The various participants in the forex capital markets are:

Banks: The inter-bank market accounts for a little over half the total trade volume. They buy and sell currencies on behalf of their customers. This could be for the purpose of trading, hedging or simply the exchanging of currencies. Banks have professionals and use sophisticated software to maximize profits.

Central banks: The central bank of a country influences the currency by setting interest rates. Reserve banks may trade in the forex market to regulate the foreign exchange rate. The trades made by them are usually enormous, resulting in short-term price swings.

Hedge funds: These are professional investment firms that manage the capital of their (usually high net worth) investors. They invest in various financial instruments, including currencies.

Commercial companies: Such companies trade on the forex market to hedge their exposure. For instance, a company that regularly exports to the US may go short in the currency to avoid exchange rate risks.

Investment funds: Funds, such as pension funds, mutual funds and arbitrage funds, invest in other countries securities.

Individual traders: The number of such traders has spiraled over the past few years. The forex market looks highly attractive, with its profit-making potential and decentralized, deregulated character.

Brokers: Brokerage firms provide individual traders access to the foreign exchange market. Brokers offer a number of services to individual traders, such as account keeping services, trade execution, various software and charts.

What Attracts Investors to the Forex Capital Market?

While forex capital markets cater to the foreign exchange requirements for trade, travel and money transfers, the trading of currencies for a profit accounts for most of the overall daily activity. Such transactions are conducted by all market participants. Some of the factors that draw investors to the forex market are: