Module 1: What forex is · Lesson 3 of 13

Who trades forex and why

3 min read

Forex is traded by central banks, commercial banks, companies, investment funds and individual (retail) traders. Some need foreign currency for real-world business, while others aim to profit from changes in exchange rates.

Banks: the core of the market

Large commercial and investment banks trade enormous amounts with each other in what is called the interbank market. They act as market makers, continuously quoting buy and sell prices, and they also trade on behalf of clients. Their quotes form the backbone of the prices you see on a trading platform.

Central banks

A central bank, such as the Bank of England or the US Federal Reserve, manages a country's money supply and sets its main interest rate. Central banks hold foreign currency reserves and occasionally step into the market to influence their own currency's value. Their decisions on interest rates are among the biggest drivers of exchange rates.

Companies

Businesses that buy or sell abroad must convert currency. A UK retailer importing goods priced in US dollars needs dollars to pay its suppliers. Many companies also hedge - they lock in exchange rates in advance to protect themselves from unexpected moves.

Example: A UK firm must pay a US supplier $500,000 in three months. If the pound weakens from 1.30 to 1.20 dollars in that time, the bill rises from about £384,600 to about £416,700. Hedging can fix the rate today so the cost is known in advance. (Figures are for illustration only.)

Investment funds

Hedge funds, pension funds and asset managers trade currencies to speculate, to hedge foreign investments, or simply because buying overseas shares and bonds requires foreign currency.

Retail traders

Individuals trade through online brokers, usually with small amounts and leverage. Their goal is normally speculation: profiting from short or medium-term price moves. Retail traders make up a small share of total volume, but online platforms have made the market far more accessible than in the past.

Risk: Retail traders compete in the same market as large, well-resourced institutions. Many lose money, particularly when using high leverage without a plan.

Key takeaways

Banks form the interbank market and supply most of the prices you see.
Central banks influence currencies mainly through interest rates and interventions.
Companies trade currency to pay for goods and to hedge against rate changes.
Retail traders mostly speculate, using brokers and leverage.

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Educational content only — not investment advice. Leveraged trading carries a high risk of loss.