Forex or the foreign exchange trading market which deals with currency trading is primarily preferred compared to the stock market
stock market.
It is true that in the forex trading market, the various external factors like bank rates, trade deficits and inflation play a very important role, but it is also worth noting that at the same time the amount of risk that is involved in stock markets is almost nil when it comes to currency trading or forex trading.
Uniform price ranges
In the stock markets, all the participants in stock trading will have to place their quotes according to a uniform price range which is applicable to all. In the forex trading market the scenario is quite different.
Here it is composed of a series of levels where different financial institutions function differently and therefore varied exchange rates are available to the investors depending on their category.
Forex Tiers
The first tier of the forex trading markets is composed of the banks which are the premier financial institutions and the interbank market boats of huge trading volumes by the various banks.
The most interesting feature of the interbank market in forex trading is that here the bid prices and the ask prices are absolutely on opposite poles and it is impossible to bridge the gap. It has been noted that as the levels of access decline, the growing difference between the bid price and the ask price widen further.
Interbank market
It has been estimated that about 53% of all forms of forex trading or transactions occur in the interbank market and huge amounts running into billions are traded every day. Foreign exchange brokers were believed to play a very significant role in facilitating transactions in the interbank market till recently.
However at present technological innovations has ensured technical support to increase transaction.
Dominance of commercial firms
The forex trading market is also dominated by the various commercial firms which are concerned with the acquiring of foreign exchange in order to purchase or pay for various merchandise that are required for facilitating their business.
While it is true that the commercial companies do not engage in higher amount engagements similar to that of the banks, but it cannot be denied that these smaller investments made by the companies may play a role in determining market factors though for a short duration.
Investment management firms
Investment management firms are concerned with the dealings with reference to foreign securities. They may engage in transactions in the forex trading market to enhance the purchase possibilities of different forms of foreign securities. A key term with reference to investment firms is ‘currency overlay’ which means that the investment management company may reduce risk possibilities to ensure wider profit chances for its client by supervising the client’s currency exposure.
Nationalized central banks also are key players in the forex trading markets and their various policies of inflation rates and money supply may significantly influence the trading of currency in the forex market. Retail forex brokers and hedge funds may also be considered as leading players in the forex trading market.