Stock Market Participants
You can read along with me on the video:
Stock Market Participants
Along with long-term investors and short term traders, there are many different types of players associated with the stock market.
Each has a unique role, but many of the roles are intertwined and depend on each other to make the market run effectively.
---Stockbrokers, also known as registered representatives in the U.S., are the licensed professionals who buy and sell securities on behalf of investors.
The brokers act as intermediaries between the stock exchanges and the investors by buying and selling stocks on the investors' behalf.
An account with a retail broker is needed to gain access to the markets.
---Portfolio managers are professionals who invest portfolios, or collections of securities, for clients.
These managers get recommendations from analysts and make the buy or sell decisions for the portfolio.
Mutual fund companies, hedge funds, and pension plans use portfolio managers to make decisions and set the investment strategies for the money they hold.
---Investment bankers represent companies in various capacities, such as private companies that want to go public via an IPO or companies that are involved in pending mergers and acquisitions.
They take care of the listing process in compliance with the regulatory requirements of the stock market.
---Custodian and depot service providers, which are institutions holding customers' securities for safekeeping so as to minimize the risk of their theft or loss, also operate in sync with the exchange to transfer shares to/from the respective accounts of transacting parties based on trading on the stock market.
---Market maker: A market maker is a broker-dealer who facilitates the trading of shares by posting bid and ask prices along with maintaining an inventory of shares.
He ensures sufficient liquidity in the market for a particular (set of) share(s), and profits from the difference between the bid and the ask price he quotes.
---How Stock Exchanges Make Money
Stock exchanges operate as for-profit institutes and charge a fee for their services.
The primary source of income for these stock exchanges are the revenues from the transaction fees that are charged for each trade carried out on its platform.
Additionally, exchanges earn revenue from the listing fee charged to companies during the IPO process and other follow-on offerings.
The exchange also earns from selling market data generated on its platform - like real-time data, historical data, summary data, and reference data – which is vital for equity research and other uses.
Many exchanges will also sell technology products, like a trading terminal and dedicated network connection to the exchange, to the interested parties for a suitable fee.
The exchange may offer privileged services like high-frequency trading to larger clients like mutual funds and asset management companies (AMC), and earn money accordingly.
There are provisions for regulatory fee and registration fee for different profiles of market participants, like the market maker and broker, which form other sources of income for the stock exchanges.
The exchange also makes profits by licensing their indexes (and their methodology) which are commonly used as a benchmark for launching various products like mutual funds and ETFs by AMCs.
Many exchanges also provide courses and certification on various financial topics to industry participants and earn revenues from such subscriptions.
---Competition for Stock Markets
While individual stock exchanges compete against each other to get maximum transaction volume, they are facing threats on two fronts.
---Dark Pools: Dark pools, which are private exchanges or forums for securities trading and operate within private groups, are posing a challenge to public stock markets.
Though their legal validity is subject to local regulations, they are gaining popularity as participants save big on transaction fees.
---Blockchain Ventures: Amid rising popularity of blockchains, many crypto exchanges have emerged.
Such exchanges are venues for trading cryptocurrencies and derivatives associated with that asset class.
Though their popularity remains limited, they pose a threat to the traditional stock market model by automating a bulk of the work done by various stock market participants and by offering zero- to low-cost services.
---Significance of the Stock Market
The stock market is one of the most vital components of a free-market economy.
It allows companies to raise money by offering stock shares and corporate bonds.
It lets common investors participate in the financial achievements of the companies, make profits through capital gains, and earn money through dividends, although losses are also possible.
While institutional investors and professional money managers do enjoy some privileges like having deep pockets, a better knowledge and higher risk taking abilities, the stock market attempts to offer a level playing field to common individuals.
The stock market works as a platform through which savings and investments of individuals are channelized into the productive investment proposals.
In the long term, it helps in capital formation & economic growth for the country.