Who are Stock Market Participants?
Stock market participants are individuals, institutions, or entities that are either actively involved in the buying or selling of securities or those who actively contribute to its smooth functioning and integrity.
Stock market participants can be categorized into different groups based on their functions, responsibilities, and levels of involvement. The main categories include issuers, investors, infrastructure providers, intermediaries, regulators, and service providers. These participants collectively contribute to maintaining standards for fair, orderly, and efficient markets.
Types of Market Participants
Market participants in financial markets can be categorized into various types based on their roles and activities in the market.
Issuers refer to entities that issue financial instruments, such as stocks, bonds, or other securities, for the purpose of raising capital. These entities can be corporations, governments, or other organizations seeking to secure funds from the public or investors.
- Public Companies
- Government Entities
Investors are individuals, institutions, or entities that allocate capital with the expectation of generating a financial return. They participate in financial markets by buying and selling various financial instruments, such as stocks, bonds, mutual funds, or other securities.
- Retail Investors
- Institutional Investors
- Accredited Investors
3. Infrastructure Providers
Infrastructure providers are entities that establish and maintain the fundamental framework and platforms necessary for the operation of financial markets.
- Stock Exchange
- OTC Markets
- Alternative Trading Systems (ATS)
- Central Securities Depository
Intermediaries serve as vital links in the financial market ecosystem, facilitating the seamless interaction between various market participants. Acting as middlemen between buyers, sellers, and other participants, these entities ensure the efficient functioning of the market.
- Stock Brokers
- Market Makers
- Clearing Houses
Regulators are government, quasi-government, independent, or self-regulated agencies or bodies responsible for overseeing and enforcing rules and regulations within financial markets. They aim to maintain market integrity, protect investors, and ensure fair and transparent practices.
- Regulatory Bodies
- Self-Regulatory Organizations (SROs)
6. Service Providers
Service providers offer specialized services that support various aspects of the financial market ecosystem.
- Registrar and Transfer Agent
- Market Analysts
- Investment Advisors
- Credit Rating Agencies
Market Participants in Stock Market
From the different categories mentioned above, let’s discuss the major participants and their roles and functions in the market.
1. Public Companies
Public companies, also known as publicly traded companies, are entities whose ownership is distributed among the general public in the form of freely traded shares of stock. Public companies that are listed on an authorized stock exchange are also known as publicly listed companies.
To become a listed company, a business usually undergoes an initial public offering (IPO), which is the process of offering its shares to the public for the first time. Once a company goes public, its shares are traded on a stock exchange, allowing investors to buy and sell them.
Other than an IPO, companies can also opt for a direct public offer (direct listing), a reverse takeover (reverse merger), or a SPAC (Special Purpose Acquisition Company) merger to become listed on an authorized stock exchange.
Public companies have a large number of shareholders, each holding a portion of the company’s ownership through shares of stock. Shareholders have certain rights, such as voting on major decisions and receiving a share of the company’s profits in the form of dividends.
Public companies are required to adhere to strict financial reporting standards. They must regularly disclose their financial performance, operational activities, and other relevant information to the public and regulatory authorities. Compared to private companies, they have a more complex organizational structure and are subject to rigorous corporate governance standards.
Public companies that are not listed on an authorized stock exchange are traded in OTC markets.
Some of the largest public companies in the world are Apple Inc. (AAPL), Microsoft Corporation (MSFT), Alphabet Inc. (GOOGL), and Amazon.com Inc. (AMZN).
2. Other Issuers
Government entities, at various levels (national, regional, or local), issue securities to raise funds for public projects, infrastructure development, or to manage fiscal deficits. Municipalities, which include cities, towns, and local government entities, also issue securities to finance public projects such as schools, roads, or utilities.
Government Entities: Governments issue Treasury bonds, Treasury bills, and other debt instruments as a way to borrow money from investors. These securities are generally considered low-risk, as they are backed by the government’s ability to levy taxes and its creditworthiness.
Municipalities: Municipal bonds are a common form of debt issued by municipalities. Investors in municipal bonds are typically attracted to the tax advantages associated with these securities. Like government entities, municipalities use the proceeds from the sale of securities to fund essential services and infrastructure development.
The U.S. has one of the largest and most liquid bond markets globally. The U.S. bond market offers a wide range of securities, including U.S. Treasuries, municipal bonds, corporate bonds, mortgage-backed securities (MBS), and agency bonds.
3. Retail Investors
Retail investors are individual investors who buy and sell financial securities for their personal accounts rather than on behalf of an organization or institution.
Retail investors use their own funds to invest in the stock market, and each of them may have different objectives for investing. These objectives may include building wealth, generating passive income, saving for retirement, tax efficiency, achieving financial independence, and funds for major life events.
Retail investors access securities markets using brokerage accounts, opting for either traditional brokers or online platforms. They often make investment decisions independently and sometimes may seek guidance from financial advisors.
They invest in various securities, including stocks, bonds, mutual funds, ETFs, real estate, and other financial instruments. They often use online investment platforms and mobile apps to manage their portfolios, execute trades, and stay updated on market trends.
While individual retail trades have minimal impact compared to large institutional trades, the collective actions of retail investors contribute to market liquidity and help maintain efficient stock markets.
4. Institutional Investors
Institutional investors are organizations that manage significant pools of capital on behalf of others. These entities include pension funds, insurance companies, mutual funds, hedge funds, and endowments.
Unlike retail investors who trade for personal accounts, institutional investors trade and invest with the goal of achieving returns for the clients or customers whose funds they manage.
Institutional investors often have professional fund managers and investment teams responsible for making strategic investment decisions. These professionals utilize sophisticated strategies to manage large and diversified portfolios.
Common types of institutional investors include:
- Mutual Funds
- Pension Funds
- Hedge Funds
- Insurance Companies
- Endowments and Foundations
- Investment Banks
- Exchange-traded Funds (ETFs)
- Sovereign Wealth Funds
- Private Equity Firms
- Venture Capital Firms
Some of the biggest institutional investors in the world include BlackRock Inc., Vanguard Group, JP Morgan Asset Management, Amundi, Abu Dhabi Investment Authority (ADIA), and Norges Bank Investment Management (NBIM).
5. Accredited Investors
Accredited investors are individuals or entities that meet specific financial criteria, granting them eligibility to invest in certain securities that are not available to the general public.
Accredited investors should meet the minimum financial thresholds, such as a high annual income or significant net worth. These criteria are established by securities regulators to ensure that investors in certain offerings have the financial capacity to bear associated risks.
Accredited investors have the opportunity to participate in private placements of securities not available to the general public. Private placements often include investments in startups, hedge funds, private equity, and other alternative investments.
In the United States, the criteria for being considered an accredited investor are outlined by the U.S. Securities and Exchange Commission (SEC) under Rule 501 of Regulation D of the Securities Act of 1933. According to these rules, to qualify as an accredited investor, an individual must have earned income exceeding $200,000 in each of the two most recent years (or $300,000 in combination with a spouse) and have a reasonable expectation of reaching the same income level in the current year. Alternatively, an individual must have a net worth (individually or jointly with a spouse) exceeding $1 million at the time of the investment, excluding the value of the primary residence. Professionals working in the finance industry who satisfy certain conditions are also eligible to qualify as accredited investors.
Traders are individuals or entities engaged in the active buying and selling of financial instruments, with the primary goal of generating short-term profits.
Unlike investors, traders operate with a short-term perspective, seeking to profit from price movements over minutes, hours, days, or months. Their primary objective is to capitalize on short-term fluctuations rather than holding positions for an extended period.
Traders employ a wide range of trading strategies based on technical analysis, chart patterns, and technical indicators. Strategies include day trading, swing trading, scalping, position trading, and algorithmic trading, each with its own approach to market analysis and execution.
Compared to investors, traders often have a high risk tolerance, as short-term price movements can be unpredictable. Successful traders implement risk management strategies to control potential losses and protect their capital.
7. Stock Exchanges
Stock exchanges are organized and regulated financial markets where securities, such as stocks, bonds, and derivatives, are bought and sold. These exchanges provide a centralized platform for buyers and sellers to conduct transactions.
Companies must meet specific listing requirements to have their securities traded on an exchange. These requirements often include financial criteria, corporate governance standards, and reporting obligations.
Various market participants, including retail investors, institutional investors, traders, market makers, and broker-dealers, engage in trading activities on stock exchanges. These participants contribute to market liquidity and efficiency.
Most stock exchanges use advanced technologies to provide electronic trading platforms, enabling faster and more efficient execution of trades. They use automated matching algorithms to continuously match buy and sell orders based on predetermined rules. Investors can place different types of orders, including market orders and limit orders. Market orders are executed at the best available price in the market, while limit orders are executed at a specified price or better.
Exchanges operate during specific hours on business days. Trading hours vary by exchange and region. Some exchanges operate continuously throughout the trading day, while others have designated trading sessions.
Prominent examples of stock exchanges include the New York Stock Exchange (NYSE), NASDAQ, London Stock Exchange (LSE), Shanghai Stock Exchange (SSE), Euronext, Tokyo Stock Exchange (TSE), etc.
8. OTC Markets
Over-the-Counter (OTC) markets are decentralized financial markets where trading of financial instruments, including stocks, bonds, and commodities, occurs directly between two parties without a centralized exchange or broker.
OTC Markets operate outside of formal exchanges like the New York Stock Exchange (NYSE) or NASDAQ. Instead of a centralized trading platform, OTC transactions take place through a network of dealers and brokers. OTC Markets facilitate the trading of various financial instruments, including stocks, bonds, derivatives, currencies, and commodities.
Major exchanges like the NYSE and NASDAQ have stringent listing requirements, including financial performance, minimum share price, and corporate governance standards. Companies that are unable to meet these requirements are usually traded in OTC Markets.
Sometimes, companies may choose OTC markets to have more control over their shares and avoid some of the regulations associated with exchanges. In some cases, companies that were previously listed on formal exchanges may voluntarily move to OTC markets. In other cases, companies delisted by stock exchanges also move to OTC markets.
In the United States, OTC Markets Group Inc. is a financial market platform that operates some of the largest Over-the-Counter (OTC) markets. They categorize OTC securities into different tiers based on the level of information and disclosure provided by the companies. The tiers include OTCQX (for established and investor-focused companies with comprehensive disclosure), OTCQB (for early-stage and developing companies that meet certain financial standards), and Pink market or Pink sheets (for companies with limited information disclosure).
9. Stock Brokers and Brokerage Firms
Stock brokers or brokerage firms are financial intermediaries that facilitate the buying and selling of securities in financial markets. They act as intermediaries between retail or institutional investors and the stock exchanges and execute orders on behalf of investors.
Stock brokers enable investors to buy and sell securities, such as stocks, bonds, options, and mutual funds, by executing trades on their behalf. Investors place orders with brokers, who then execute these orders on the stock exchanges or other trading platforms.
There are different types of brokers, including full-service brokers and discount brokers. Full-service brokers offer a range of services, including investment advice, research, and financial planning. Discount brokers, on the other hand, focus on executing trades at lower commission rates but may provide fewer additional services.
Many brokers offer online trading platforms (both web-based and mobile-based) that enable clients to place orders, monitor their portfolios, and access financial information over the internet. Most brokers also offer research and analysis tools on their platforms, providing investors with information about stocks, market trends, and economic indicators.
The largest brokerage firms in the U.S. include Charles Schwab, Fidelity Investments, Merrill Lynch (Bank of America), J.P. Morgan, and Vanguard.
10. Alternative Trading Systems (ATS)
An Alternative Trading System (ATS) is a trading platform that operates outside of traditional stock exchanges. These systems provide a venue for buyers and sellers to trade financial instruments, such as stocks or bonds, directly with each other, without the need for a traditional exchange intermediary.
While the concept of alternative systems to stock exchanges exists in many countries, the term Alternative Trading Systems (ATS) is used mainly by the U.S. and Canada. In the European Union, similar platforms are known as Multilateral Trading Facilities (MTFs). In Japan, they are often called Proprietary Trading Systems (PTS).
ATSs are often used for large block trades that might have a significant impact on the market if executed on a public exchange. By allowing for more discreet trading, ATSs can help minimize market impact. ATSs also offer a level of confidentiality or anonymity for traders. This is particularly attractive to institutional investors who may not want to reveal their trading intentions to the broader market.
Some ATSs are referred to as dark pools because they do not display order book information or trade data publicly. This lack of transparency is designed to prevent information leakage and minimize market impact for large trades.
Examples of ATSs in the U.S. include Instinet, Liquidnet, PureStream, and various dark pools. The U.S. has a well-established market for ATS, regulated by the Securities and Exchange Commission (SEC) under Regulation ATS.
Similarly, the Canadian Securities Administrators (CSA) regulate alternative trading systems in Canada. In the EU, MTFs operate under the regulatory framework of MiFID II (Markets in Financial Instruments Directive) and MiFIR (Markets in Financial Instruments Regulation).
11. Market Makers
Market makers are financial entities that facilitate the liquidity and smooth functioning of financial markets by continuously buying and selling financial instruments.
Market makers act as liquidity providers by standing ready to buy or sell a particular financial instrument at publicly quoted prices. This continuous presence helps ensure that there are always available buyers and sellers for the security, allowing investors to execute trades quickly.
Market makers quote bid (buy) and ask (sell) prices for the securities they cover. The bid price is the maximum price a buyer is willing to pay for a security, while the ask price is the minimum price a seller is willing to accept. The difference between these prices is known as the spread. The spread also represents their profit for the market making activities.
In some markets (such as NYSE), there are designated market makers who have specific responsibilities, such as maintaining an orderly market, in addition to regular market-making activities. Such exchanges usually assign Designated Market Makers (DMMs) to specific stocks.
Some of the well-known market makers are Citadel Securities, Virtu Financial, Jane Street, Two Sigma Securities, and Susquehanna International Group (SIG).
12. Clearing Houses
Clearing houses, also known as clearing corporations, are financial intermediaries that facilitate the smooth and secure settlement of trades in various markets, including stock, commodity, and derivatives markets.
Clearing houses facilitate the settlement of trades by ensuring that the securities are delivered to the buyer and the payment is delivered to the seller. They add security and confidence to the trading process by ensuring that transactions are completed as agreed.
Many clearing houses operate as central counterparties (CCPs), becoming the buyer to every seller and the seller to every buyer. This arrangement, known as novation, helps reduce counterparty risk. In the event that one of the parties fails to fulfill its obligations, the clearinghouse steps in to ensure that the trade is completed successfully.
The CCP imposes margin requirements on market participants. Participants are required to deposit collateral (margin) with the clearinghouse, which serves as a buffer against potential losses. In the case of a default by a market participant, the CCP has well-defined procedures for managing the default. This may involve using the defaulting member’s margin and collateral to cover losses and fulfill the obligations of the defaulted trade.
Major clearing houses in the U.S. include Depository Trust Company, Options Clearing Corporation, and ICE Clear.
Depositories are financial institutions responsible for the safekeeping and maintenance of securities, such as stocks and bonds, owned by investors in electronic form.
Depository institutions are commonly known as Central Securities Depositories (CSDs) or simply as depositories.
Depositories hold securities such as stocks, bonds, and other financial instruments in electronic form on behalf of investors. This eliminates the need for physical certificates and the risks associated with it, such as loss or theft. Depositories also facilitate the conversion of existing physical securities into electronic form, a process known as dematerialization.
When securities are bought or sold in the market, depositories ensure the smooth transfer of ownership from the seller to the buyer. This process involves updating electronic records to reflect the change in ownership.
Depositories are also involved in facilitating and managing various corporate actions. In cases of stock splits or bonus issues, where the number of shares held by investors increases, depositories adjust their records accordingly. In the event of mergers or acquisitions, depositories facilitate the exchange or conversion of securities as per the terms of the corporate action. When a company declares dividends or interest, depositories ensure the distribution to the respective shareholders.
In the United States, the biggest securities depository is the Depository Trust Company (DTC), a subsidiary of the Depository Trust & Clearing Corporation (DTCC). In the European Union, there are two major CSDs: Euroclear and Clearstream.
Regulators are government or independent agencies responsible for overseeing and regulating the stock market and securities industry. They enforce rules and regulations to ensure market integrity and efficiency, protect investors, and promote fair and transparent trading.
Regulators create and enforce rules and regulations that govern the market and market participants. These rules cover areas such as disclosure requirements, trading practices, corporate governance, conduct of participants, and other market activities.
One of the central roles of regulators is to protect investors. They achieve this by ensuring that market participants adhere to fair practices, provide accurate and timely information, and take action against fraudulent activities. Regulators conduct surveillance of market activities to detect irregularities or violations of regulations. When violations are identified, regulators have the power to enforce penalties, fines, and other disciplinary actions.
Regulators also oversee the listing of securities on stock exchanges and ensure that listed companies comply with disclosure requirements. They may also have the authority to suspend or delist securities in cases of non-compliance.
In the United States, the Securities and Exchange Commission (SEC) is the primary regulator of the securities market. Similarly, the Financial Conduct Authority (FCA) regulates the financial markets and firms in the U.K.
Regulators often collaborate with Self-Regulatory Organizations (SROs) to enhance market oversight. SROs, such as stock exchanges, may enforce their own rules, but they work within the broader regulatory framework set by government regulators.
15. Self-Regulatory Organizations (SROs)
SROs are independent, non-governmental entities that have the authority to regulate and oversee their members within a specific industry or sector.
Unlike government regulatory bodies (for example, SEC) established by legislation or regulatory framework, SROs are independent, non-governmental entities established by the industry participants themselves.
Self-Regulatory Organizations (SROs) create and enforce industry-specific rules and regulations to ensure compliance with securities laws and market fairness. Entities operating within the industry covered by an SRO typically become members. SROs monitor their members to ensure compliance with established rules, standards, and ethical guidelines.
One of the primary objectives of SROs is to protect investors. They aim to create an environment where investors can trust the fairness of the market and the conduct of the industry participants.
While independent, SROs often collaborate with governmental regulatory authorities to align industry standards with broader regulatory goals. They are also subject to the oversight of such governmental regulatory bodies.
Examples of SROs include the Financial Industry Regulatory Authority (FINRA) in the United States, which oversees brokerage firms and their registered representatives, and the Canadian Investment Regulatory Organization (CIRO) – previously known as the Investment Industry Regulatory Organization of Canada (IIROC) – which regulates investment dealers and trading activity in Canada.
16. Registrar and Transfer Agent
A registrar is an entity appointed by a company that is responsible for maintaining accurate and official records of securities issued by that company. A transfer agent is an entity appointed by a company to process changes in ownership during the transfer of securities between buyers and sellers.
In most cases, especially in smaller companies, the roles of registrar and transfer agent are usually handled by a single entity. The registrar’s main focus is on record-keeping and ensuring the integrity of ownership information for a company’s securities. The transfer agent is responsible for processing changes in ownership, issuing and cancelling certificates, and handling other administrative tasks related to securities ownership.
In the United States, usually, separate registrars are not appointed, as is done in some other jurisdictions. Instead, companies in the U.S. appoint transfer agents who are responsible for maintaining shareholder records, handling the transfer of securities, and managing other administrative tasks related to securities issuance and transfers. Transfer agents act as intermediaries between issuing companies and security holders.
Transfer agents in the U.S. are mandated to register either with the SEC or, if they are a bank, with a bank regulatory agency. The SEC has established comprehensive rules and regulations that apply to all registered transfer agents.
Underwriters are financial institutions or investment banks that assess and assume the risk associated with issuing new securities, such as stocks or bonds, on behalf of companies.
Underwriters play a major role in the initial public offering (IPO) or any new securities issuance process, helping companies determine the offering price, creating the prospectus, and guaranteeing the sale of the securities to the public. Their primary function is to assess the risk associated with issuing securities and then assume this risk for a fee.
So, how does it work? When a company decides to go public or issue new securities, it seeks the assistance of underwriters to facilitate the offering. Underwriters help the issuing company determine the optimal offering price for the securities based on various factors, including market conditions, the company’s financial health, comparable transactions, and investor demand.
They also assist in creating the prospectus, a document that provides essential information about the company and the securities being offered. This prospectus is then submitted to regulatory authorities. Investors also depend on the prospectus to assess the company when determining whether to participate in the IPO or not.
Underwriters commit to purchasing the securities from the issuing company at a predetermined price and then resell them to the public. In this way, underwriters essentially guarantee the sale of the securities. They earn their fees from the difference between the price at which they buy the securities from the issuer and the price at which they sell them to the public.
18. Market Analysts and Researchers
Market analysts are individuals or professionals who specialize in studying financial markets, including stocks, bonds, commodities, currencies, and other investment instruments. Researchers, on the other hand, conduct in-depth studies and analyses on various financial instruments, economic indicators, and investment strategies.
Market analysts analyze market trends, sentiment, and price movements to identify potential investment opportunities or risks. They consider factors such as economic conditions, regulatory changes, and technological advancements.
Market analysts provide forecasts, recommendations, and data that assist investors in making informed decisions. They often specialize in specific industries or sectors, offering insights into the performance of companies within those areas.
Researchers typically delve into broader studies, gathering relevant data from sources like financial statements, economic reports, and market data. Using mathematical models and statistical tools, researchers create financial models to simulate different scenarios and outcomes. Their findings are presented in reports and research papers, offering recommendations to investors, fund managers, or other stakeholders.
19. Investment advisors
Investment advisors are professionals or firms that provide financial advice and services to individuals, institutions, or entities looking to make investment decisions.
Their primary role is to offer guidance on various aspects of investing, including asset allocation, portfolio management, and financial planning. Investment advisors aim to help clients achieve their financial goals and objectives while considering their risk tolerance, time horizon, and specific financial circumstances.
These advisors may offer personalized investment strategies, recommend specific securities or investment products, and provide ongoing monitoring and adjustments to portfolios as needed. Some investment advisors may specialize in certain areas, such as retirement planning or tax-efficient investing. The quality of advice can vary depending on the advisor’s expertise.
Many financial advisors offer portfolio management services, where they design and manage investment portfolios on behalf of their clients, making buy and sell decisions to align with the client’s goals.
Investment advisors charge fees for their services, often based on a percentage of assets under management (AUM). These fees can reduce overall returns.
20. Credit Rating Agencies
Credit Rating Agencies (CRAs) are independent entities that assess the creditworthiness of companies, governments, or financial instruments. These agencies evaluate the likelihood that an issuer of debt securities will meet its financial obligations, particularly the timely repayment of principal and interest.
By analyzing the financial health, repayment capacity, and overall creditworthiness of an issuer, Credit Rating Agencies provide investors with an informed opinion on the credit risk associated with the entity or financial instrument.
The primary instruments rated by CRAs include corporate bonds, government bonds, municipal bonds, structured finance products (such as mortgage-backed securities), financial institutions (banks and other lenders), insurance companies, sovereign and sub-sovereign entities (countries and regional governments), short-term debt instruments (such as commercial paper), and credit default swaps (CDS).
CRAs assign credit ratings to entities and financial instruments based on their evaluation of the issuer’s ability to meet its financial obligations. These ratings are expressed in letter grades or alphanumeric symbols, each indicating a certain level of credit risk. Higher credit ratings imply lower credit risk, while lower ratings indicate higher risk.
Changes in credit ratings can impact the pricing of securities in the market. Upgrades or downgrades can lead to shifts in demand, affecting the prices of bonds and other debt instruments. Well-known credit rating agencies include Moody’s Investors Service, Standard & Poor’s (S&P), and Fitch Ratings.