Market participants

Why is it important to know the market participants on the stock exchanges?

What market participants can be distinguished and what are they looking for?

1.) Institutional investors

Institutional investors can be banks, insurance companies, enterprises, or investment funds, to name but a few. These investors pursue different investment objectives. Clear interests cannot be defined here accordingly. It is important to realise that they move large sums of capital with this group of market participants, however. Daily market fluctuations are of no interest. The exact entry or exit plays a completely subordinate role as a result of this. Major trends or price developments are traded instead. Most trading decisions are made based on fundamental judgements or strategic considerations. Only parts are sent to execution when building and removing positions. Otherwise, the players would ruin their own courses. In particular small investors must be aware of this since one should not go up against the big capital. The major investors ultimately determine the direction of the market.

2.) Hedgers

Hedgers are market participants who have no interest in achieving a profit with their positions. Instead, they try to hedge their existing positions or risks. A mechanical engineering company, for example, is exposed to the risk of raw material price trends. The company can hedge against this risk and thus secure its own calculations. This company could, for example, build up long positions against rising commodity prices. If commodity prices actually rise, the costs for the respective company would increase, while profits would also be made on the futures contracts. If prices go down, however, costs would fall, but the long positions would produce a loss. This permits hedging against this type of price fluctuation.

3.) Speculators

Speculators always try to achieve profits on the markets, regardless of whether they rise or fall. They try to figure out where movement develops and will enter the corresponding positions. If they believe that prices will rise, they will buy long positions. Vice versa, they will buy, short positions. They thus try to achieve systematic profits regardless of the market situation.

4.) Central banks

A new group of players has entered the market with the central banks. Their task is ensuring price stability and supporting general economic policy. The central bank can both control the value of money and supply the economy with credit by varying the interest rate. However, central banks can also buy and sell securities. This is called open market transactions. Central banks have a decisive influence on the markets due to this. They move even larger sums of capital than the other institutional investors.

5.) Arbitrageurs

Arbitrageurs are market participants that try to make risk-free profits. They exploit valuation differences between certain asset classes. Thanks to the arbitrageurs, price differences can hardly occur on the markets, as they always ensure equalisation. Computers try to facilitate such arbitrage transactions in high-frequency trading today.

What level of information do the individual market participants have?

What consequences are there from complete information efficiency on the capital markets?