As a trader, you'll come into contact with various individuals and bodies, and in some cases need their services to gain access to the markets. Here we'll look at these 'market participants', their functions and their motivations – and importantly your relationship with them.
Retail traders
The terms 'retail trader' or 'retail investor' generally mean a private individual who buys and sells financial instruments using a personal account, not on behalf of an organisation. So that will probably be you. Retail traders generally deal in relatively small sizes, often in their spare time. However, some become semi-professional and use sophisticated technology and techniques from the comfort of their own homes. As a retail trader you have access to an incredible range of financial markets, and can trade them in multiple ways to suit your preferences.
Let's say you decide to buy some shares. Would you be hoping to see long-term growth, accepting that the shares' value may fluctuate in the meantime? Or would you be hoping for a fast profit from short-term price movements, regardless of longer-term trends?
If you're looking for long-term growth, you're more of an 'investor', but if a fast profit is your goal you can call yourself a 'trader'. Investors are interested in overall price trends and the fundamental value of the assets they trade. Traders generally prefer to capitalise on volatility and the market reactions triggered by news events.
Brokers
As a retail trader, unfortunately you can't just stroll into your local stock exchange and start dealing in shares.
To buy or sell in the stock market, and other financial markets, you'll generally need an authorised intermediary or broker to act on your behalf. You may be picturing a bowler-hatted City gentleman, but in fact it's more likely to be a company that provides an online trading platform.
- Full service – actively managing your investments and providing personal advice;
- Advisory management – providing recommendations but leaving the final decision to you;
- Execution-only dealing – simply carrying out your instructions to trade, on demand.
Of course, the greater the input you want from your broker, the higher the fee you'll need to pay. As well as representing you and executing your trades, some brokers also separately buy and sell on their own account. A broker who does this is known as a broker-dealer.
Other market participants
There are some market participants who you're unlikely to deal with directly, but still have a major influence on the markets and asset prices.Market makers
Suppose you want to buy a particular financial instrument, but nobody is selling. Fortunately this situation is unusual: there's generally a party who'll take the other side of your trade, and it's often a market maker - otherwise known as a liquidity provider. A market maker is a firm or individual that holds an inventory of a particular security and quotes continuous prices to buyers and sellers.
So if you place an order that goes through a market maker, it either deals from its own holding or seeks another party's order to offset yours. This happens electronically, almost instantaneously.
Most market makers operate within exchanges, so your broker will transact with them on your behalf. The only market makers you're likely to deal with directly are forex trading firms, which offer clients the facility to buy or sell currencies OTC. Institutional investors or traders are organisations that deal in the financial markets, generally on a much larger scale than retail traders. As a retail trader, you may have little contact with these institutions, but it's useful to be aware of their activities. Institutional traders manage pools of money on behalf of individual investors, and this means they sometimes make trades of a magnitude such that they influence market price movements, particularly in shares.
