Where The Money in Forex Comes From?
A very common question asked by the beginners is, who pays for the forex exchange market? And where does the money in forex come from and who owns the exchange market? A lot of questions come to mind & the thing is that not only new traders or interested people ask these. But also some intermediate traders ask the same question, they don't know where the money in forex comes from? You can check the complexity of this question, by thinking more about its answer.
Now, you may think that this complicated currency-market question will have a complicated answer also, but things are not like this. The answer to this fx trading question is very simple, but if you don't understand the logic behind this answer then it will become complicated for you.
A Kind Of Virtual Market Running On Beliefs
The reality of the retail forex market is that there is no physical money in foreign exchange trading. Yes, this online forex market doesn't have any stored money as capital or in any form. Now you may wonder because you have heard that the forex market is among the largest financial markets in the world.
How strange it is that the largest financial market of the world doesn't have any financial capability on its own. Then who funds the global market and from where money in forex comes from? The answer is that no one is funding the market. This market runs on a virtual belief which means that you are dealing with other forex firms and traders with a belief.
Interbank Market: The Major Trade Forex Market
If the currency trading market doesn't have any money then how can it be the largest retail foreign exchange market in the world? How can it be impacted by the speculative global economy and how is it possible that forex has an impact on the global economy too? If you don't know then let's tell you that the major market of forex is the central bank market. The trade currencies market where we live trade as individual traders or small firms is OTC or Over-the-counter market in forex.
But the major forex online market is called the interbank forex market. It has the top market makers banks of the world as the participants in forex pairs management. These banks or national futures associations are trading their money in the forex market. The minimum amount or equities that a bank can trade is one million dollars.
No One Control: But Banks Have More Power
So you can see that banks are trading a huge amount of money in the forex market. So we can say that the banks have a stronger position in this arena, but if you ask who pays forex?
Then the answer is not banks as the banks are not controlling the forex trading system. Also, they are not paying any money to the individual trader who wins a trade. But still, the banks have a strong and effective role in the forex market. It's due to the huge amount of money that is traded by the banks in the online forex trading market.
Forex Market: Is There No Money In It?
Can we assume that there is no money in the forex market, yes, there is no money in existence? But that doesn't mean you cannot earn through the forex market. You can make money through the forex market like the other forex traders are making.
We can say that there is no existence of money but the traders enter the forex market along with the money. We hope that you know the basics of the forex market so that you can start with ease. So we are not going to explain to you what forex is and how does it work? Rather, we will tell you more about the forex participants and their roles.
Where Does Money Go After Losing?
Let's not make it more complex to understand as we can simply understand it is a very common way. If you win a trade in the forex market, then you get money. But on the other hand, someone is losing money, so the person who lost money will pay for your profits.
You can see this is the answer to the question: who pays forex profits? Forex profits are paid by the forex lost caused to other traders. So when someone is losing a trade, it means someone is winning on the other side. Because forex is a virtual market, you cannot see who is losing due to your victory. It is very clear that when you lose funds in forex, your money will be given to someone who is the winner of a trade.
Forex Participants— And Their Roles
You must know all about the forex participants and their roles in the market and what they do in the fx-market. You may want to know how brokers make money in the forex market and how banks and other firms are trading. So below is the complete information on forex participants that you need to know as a beginner.
As we have told you earlier that banks are the main entities in forex trading. Don't think that you are going to trade against banks in the forex market. Because foreign exchanges are divided into various forex trade sections.
If you are an individual forex trader, then you will trade in over the counter markets. If you are a financial firm you will still trade in the OTC as an individual trader, you are never going to trade with banks. This is because banks are trading in the Interbank market of forex.
#2. Central Banks
Central banks are different from commercial banks and these banks are like a nation’s own bank. Sometimes banks for international settlements also participate in this activity. A bank that has the wealth of a nation, so these banks are not trading any money in the forex. But still, they have a very important role in the forex currency market, they are responsible for restrictions, rules, and some other trading segments.
The individual traders are the highest number of participants in the trading systems and they are trading their own money. Individuals enter the market through various forex brokers, also, they come through some investment managers and companies. They have the least control over the market trends.
#4. Firms & Managers
Other trading participants are firms, corporations, and investment managers, they invest the money of others. But they choose strategies on their own and is it the exact opposite of the brokers.
Brokers are not investing any money, they just register you as a trader and give you access to the investment opportunity of the market. Brokers are earning through the spreads of trades and they are functions on other rules. They are opposite to firms & Managers because they are not using any strategy on their own. The trader is using his/her strategy even if he/she is trading through a broker.
Don't be confused about the forex market as it's a straightforward and organized market place. You must understand the strategies that work behind the foreign exchange if you want to make a profit. Yes, these questions are also important but you will become more confused about them if you try hard to find an answer. Simply without being confused you can assume that it is like gambling.
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