It is necessary to understand what place a private investor is taken in the system of the world currency exchange before starting trading at Forex. Understanding types of Forex participants and their influence on the market helps to make clear how currency rates are changing. A bit simplified scheme of the market participants’ cooperation is described below.
The center link of the international currency exchange system is brokerage companies, or in other words brokerage house. They play a role of the intermediaries between the other major Forex players. Commercial banks are the main Forex participants. They may execute sell/buy deals themselves or on behalf of their clients. Such deals may be executed directly with other banks which they have managed to agree on rates with or via Brokerage companies. Here is the simplified scheme of cooperation – dealing department of the commercial bank contact a brokerage company and ask for the deal conditions which other banks are offering at the moment. In case the conditions of the deal suit, banks close a deal via Brokerage Company which makes profit on commission (percentage of the executed deal). Thus, brokerage companies act as a central place where currency rates are formed. Commercial banks receive information about the level of rates from the brokerage companies.
Other major Forex players are national banks of different countries. These participants access the market not for profit generation but for exchange rate and as consequence its economy adjustment. Often national banks close deals not directly but via one or several commercial banks covering up their activity. National banks of the developed countries may unite in order to reach the common goal.
All mentioned above Forex players are active participants; they do not only execute operations at the Forex market but offer their own prices (quotes). Active participants as a rule execute deals on millions US Dollars and do not use margin trading. They are also called market-makers. There are also passive participants at Forex, those who do not set quotes and may just close deals with quotes offered by the active participants.
Different investment funds are passive participants. Such companies place funds in the securities of the government and corporations of different countries when execute currency speculations. One of the most famous investment funds is “Quantum” of George Soros. At investment funds disposal there are milliards of US Dollars, moreover the may attract milliards US Dollars of borrowed funds, that is why investment funds may resist to national banks’ interventions.
Other type of the market passive players is participants of the foreign trade. These are companies which export and import goods. If an import deal is executed in the foreign currency this currency should be bought before the deal closed. On the other hand, if an export deal is closing in the foreign currency, this currency should be sold after the deal is executed. Such operations are executed via commercial banks. Next passive participants are international corporations – these are companies which have representative offices abroad. When funds are moved from the representative offices to the Headquarters, conversional operations are used, which are executed via commercial banks.
Step by step we come to the role of the private investor at Forex. Private investor as a rule does not have any capital, which is enough for closing deals via brokerage houses – minimal amount of such a deal is 100000 US Dollars. Via commercial banks private investor may execute buy/sell deals but speculate on exchange rates of the commercial banks is impossible for him/her. Commercial banks’ rates are changing once in 24 hours and the difference between sell and buy rate (spread) is very high. That is why commission houses appeared. Using the principal of margin trading private investor may execute deals even having modest capital.
With the Internet development brokerage houses evolved to the dealing centers and now provide services to everybody. Any person who has several thousand US Dollars may try himself/herself at Forex. But do not hurry! Before you open an account in one of the dealing centers read special materials about Forex and trade at demo-account for several months. You will not lose anything and get invaluable experience.