Market Participants
Learn who trades in the stock market and the different roles participants play.
Learning Objectives
- Distinguish between retail and institutional investors
- Understand what market makers do and why they matter
- Learn about the role of brokers
- Recognize how different participants influence the market
Market Participants#
The stock market isn't just one monolithic entity—it's a complex ecosystem of different participants, each playing a specific role. Understanding who these players are helps you see where you fit in and how the market actually functions.
The stock market brings together various participants: individual investors like you, large institutions, market makers who provide liquidity, and brokers who facilitate trades.
Retail Investors#
Retail investors are individual, non-professional investors who buy and sell securities for their personal accounts. That's you!
Characteristics of Retail Investors#
- Trade for personal investment goals (retirement, wealth building)
- Generally trade smaller amounts compared to institutions
- Use brokerage accounts to access the market
- Make decisions independently or with financial advisors
Retail Investor Growth#
The retail investor landscape has changed dramatically:
| Era | Characteristics |
|---|---|
| Pre-2000s | High commissions, limited access, broker-dependent |
| 2000s-2010s | Online brokers emerge, lower commissions |
| 2020s | Commission-free trading, mobile apps, increased participation |
Today's retail investors have more tools, information, and low-cost options than ever before. You can access the same markets as professional investors, though institutions still have some advantages in resources and information processing.
Institutional Investors#
Institutional investors are organizations that invest large sums of money on behalf of others. They're the "big players" in the market.
Types of Institutional Investors#
| Type | Description | Example |
|---|---|---|
| Mutual Funds | Pool money from many investors to buy diversified portfolios | Vanguard Total Stock Market Fund |
| Pension Funds | Manage retirement savings for employees | CalPERS, Teachers' Retirement System |
| Hedge Funds | Use sophisticated strategies for accredited investors | Bridgewater Associates, Citadel |
| Insurance Companies | Invest premiums to meet future claims | MetLife, Prudential |
| Endowments | Manage funds for universities and nonprofits | Harvard Endowment, Yale Endowment |
| ETF Providers | Create exchange-traded funds tracking indices | BlackRock (iShares), State Street (SPDR) |
Why Institutional Investors Matter#
- Move markets: Their large trades can significantly impact stock prices
- Own most stocks: Institutions own roughly 70-80% of the U.S. stock market
- Set standards: Their buying patterns can influence which companies succeed
- Provide liquidity: Their trading activity helps keep markets functioning
Institutional vs. Retail
While institutional investors have more resources, retail investors have advantages too: flexibility, no pressure to meet quarterly targets, and the ability to hold investments indefinitely without reporting requirements.
Market Makers#
Market makers are firms that stand ready to buy and sell stocks at publicly quoted prices, providing liquidity to the market.
How Market Makers Work#
- Quote bid and ask prices continuously throughout the trading day
- Buy from sellers even when there's no immediate buyer
- Sell to buyers even when there's no immediate seller
- Profit from the spread between bid and ask prices
- Manage inventory of stocks they hold
Why Market Makers Are Important#
Without market makers, you might place an order and wait indefinitely for another person to take the other side of your trade. Market makers ensure:
- Immediate execution: Your trades can execute quickly
- Tighter spreads: Competition among market makers keeps spreads narrow
- Price stability: They absorb temporary supply/demand imbalances
When you place a market order, a market maker is often on the other side of your trade. They provide immediate liquidity in exchange for the spread.
Major Market Makers#
- Citadel Securities
- Virtu Financial
- Two Sigma Securities
- Susquehanna International Group
Brokers#
A broker (or brokerage firm) acts as an intermediary between you and the stock market. You can't trade directly on an exchange—you need a broker.
What Brokers Do#
- Execute trades on your behalf on exchanges
- Hold your securities in a brokerage account
- Provide tools for research, analysis, and order placement
- Handle settlement and administrative tasks
- Offer educational resources for investors
Types of Brokers#
| Type | Features | Examples |
|---|---|---|
| Full-Service | Personal advice, research, higher fees | Morgan Stanley, Merrill Lynch |
| Discount/Online | Self-directed, low/no commissions | Fidelity, Charles Schwab, TD Ameritrade |
| Mobile-First | App-based, commission-free | Robinhood, Webull, SoFi |
Choosing a Broker#
Most beginning investors use discount or mobile brokers because:
- Commission-free stock trading is now standard
- User-friendly platforms and apps
- No minimum account requirements at many firms
- Access to educational resources
Other Market Participants#
Regulators#
- SEC (Securities and Exchange Commission): Primary U.S. securities regulator
- FINRA (Financial Industry Regulatory Authority): Oversees brokers and dealers
- Stock Exchanges: Self-regulatory organizations with their own rules
Analysts and Rating Agencies#
- Research analysts study companies and make recommendations
- Rating agencies assess bond creditworthiness
- Their opinions can influence stock prices
Index Providers#
- Companies like S&P Global, MSCI, and FTSE Russell create indices
- Index inclusion/exclusion can significantly impact stock prices
- They determine which stocks index funds must buy
How It All Connects#
Here's a simplified view of how a trade flows through the market:
- You decide to buy a stock
- Your broker receives your order
- Broker routes order to an exchange or market maker
- Market maker or seller takes the other side
- Exchange matches and records the trade
- Clearinghouse settles the transaction
- Shares appear in your brokerage account
All of this typically happens in fractions of a second for most retail orders!
Key Takeaways
- Retail investors are individuals investing for personal goals
- Institutional investors (mutual funds, pensions, hedge funds) manage large pools of capital
- Market makers provide liquidity by always being willing to buy or sell
- Brokers are intermediaries that execute your trades and hold your securities
- Regulators oversee the market to protect investors
- Understanding market structure helps you become a more informed investor