Market participants on the stock market

Why is it important to know the participants of the stock markets?

The market participants pursue different objectives. They also have a different time horizon, which they choose for their investment. For this reason, it is important to get to know the market participants in order to find out how they think. Especially when trading speculatively, one should consider in which situations certain market participants are forced to act and trade.

All market participants have the same goal of reaping as high a return as possible, with the lowest possible risk. Unfortunately, these two interests are completely contrary to one another. In perfect markets, the investor always receives the same return for a certain amount of risk.

Which market participants can be differentiated between and which interests do these market participants have?

1.) Institutional investors

Institutional investors can be, for example, banks, insurance companies, enterprises or even investment funds, to name but a few. These investors have different investment objectives. Thus, one cannot define any clear interests here. It is important to know, however, that this group of market participants move large sums of capital. The daily market fluctuations are not of interest. Accordingly, the exact entry or exit into the market plays a completely subordinate role here. Rather, major trends or price developments are traded. Most trade decisions are made on the basis of fundamental assessments or strategic considerations. Both for entry and exit of positions, only parts are given to trade. Otherwise the players would break their own rates and prices. Especially as a small investor, it is important to be aware of this since you should not oppose large amounts of capital. The big investors fundamentally determine the direction on the market.

2.) Hedgers

Hedgers are market participants who do not pursue the interest of realising profits with their positions. Rather, they try to secure their existing positions or risks. A mechanical engineering company, for example, has the risk of commodity price development. The company can hedge against this risk and thus secure its own pricing. To control rising commodity prices, for example, this company could build up long positions. If the prices of these commodities then actually increase, the costs would also increase for the company, but the profits would also increase in terms of futures contracts. On the other hand, decreased prices would lead to lower costs, but the long positions would produce a loss. In this way, one can protect oneself against these types of price fluctuations.

3.) Speculators

The speculator always tries to realise profits on the markets, regardless of whether these rise or fall. He tries to find out where movement is occurring and enters at the respective position. If he is of the opinion that prices are rising, he buys long positions. In the opposite case, he buys short positions. Thus, he tries to realise systematic profits irrespective of the market situation.

4.) Zentralbanken

A new group of players came to the market in the form of central banks. They have the task of maintaining price stability and supporting the general economic policy. By varying the interest rates, the central bank can, on the one hand, control value retention, and on the other provide the economy with loans. However, central banks can also buy and sell securities. This is called an open market transaction. For this reason, central banks have a decisive influence on the markets. They move even larger sums of capital than the other institutional investors.

5.) Arbitrageurs

Arbitrageurs are market participants who attempt to attain risk-free profits. They use valuation differences of certain asset classes. Because of arbitrageurs, hardly any price differences in the markets can arise, since they always make sure that it is aligned. In today’s world, computers in high-frequency trading attempt to facilitate such arbitrage transactions.

How much information do each of the market participants have? (level of information)

In order to know the information level of each market participant, one must first busy oneself with the information efficiency of the capital markets.

In the case of complete information efficiency, the rates of the securities of future cash flow would be priced in, as the information relevant to the valuation is shown in the rates. The prerequisite for this is that every market participant always has the same information at the same time and interprets it in the same manner. In this case, the return on a securities portfolio would always generate the balance return. In other words, the return on a securities portfolio can be represented as a linear function depending on the risk. Extreme ups or downs do not exist with complete information efficiency.

Which results does complete information efficiency have on the capital markets?

  • No arbitrage transactions would be possible since there wouldn’t be any differences in the valuation of the securities. The group of arbitrageurs would therefore not exist.
  • There would be no excess returns on the market. The systematic analysis of information would not bring anything, as a securities portfolio would always generate the balance return.

This makes it completely clear that complete information efficiency is not present on the capital market. The market participants’ level of information is not homogenous since the information on the market is not available free of charge.


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7. Market participants
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