Definition

Market Participants

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What is meant by the term market participants?

Market participants are the legal entities that are involved in the process of buying and selling assets or liabilities in their principal market. Their actions have a role to play in determining the fair market value of these instruments being traded in the respective market. When the number of market participants is higher, the market value appears more credible.

 

Summary
  • Market participants are the legal entities that are involved in the process of buying and selling assets or liabilities in the respective markets.
  • Brokers, custodians, hedgers, portfolio managers, investment advisers etc. are all market participants.

Frequently Asked Questions (FAQs)

What are some examples of market participants?

The major market participants and their roles are explained as follows:-

Brokers

Broker-dealers or stockbrokers are licenced professionals who trade securities on behalf of investors. They charge a fee for facilitating securities trades between buyers and sellers. Brokers operate as a link between the stock exchanges and the investors, purchasing and selling equities on their behalf. To access the markets through them, an account needs to be registered with a retail broker. Brokers may purchase securities from a customer selling them or sell securities from its own inventory to a customer buying them. These brokers exist to provide value to their consumers by assisting them in obtaining the best rate possible. They may, for example, assist their clients in obtaining the lowest purchase price or the highest selling price by making bids from numerous dealers available. Another key benefit of using brokers is the ability to trade anonymously.

Forex dealers are among the market's most active participants. Banks make up the majority of Forex dealers around the world. The interface for dealer communication is also referred to as interbank market. Several noteworthy non-bank financial institutions also handle foreign exchange. The dealers take part in the Forex market by constantly offering bid-ask rates for currency pairs. Some brokers deal with a single currency pair.

Portfolio Managers

Portfolio managers are individuals who manage client portfolios or collections of securities. Analysts provide suggestions to these managers, and they decide whether to buy or sell the portfolio. Various entities employ portfolio managers to make investment decisions and develop investment strategies for the money held by them.

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Investment Bankers

Investment bankers represent businesses in various capacities, such as private corporations seeking to go public through an initial public offering (IPO) or businesses involved in upcoming mergers and acquisitions. They handle the listing procedure in accordance with the stock market's regulatory standards.

Custodian

Custodian and depot service providers are responsible for holding customers' assets for safety and ensuring the asset transfer from one party to another depending on the trade.

Transfer Agents

Transfer agents keep track of security ownership changes, manage security holder records for the issuer, revoke and issue certificates, and disburse dividends. They stand between the issuing corporations and the security holders. Transfer agents must be registered with the country's respective authority or, if they are a bank, with a bank regulatory body.  The goal is to make it easier to clear and settle securities transactions quickly and accurately while also ensuring the security of the respective assets and cash.

Stock Exchange

The stock exchange is a market for trading financial instruments such as stocks, bonds, and commodities. It is a marketplace where buyers and sellers meet to exchange financial instruments in the trading hours during the business day while complying to regulatory rules. Only corporations that are listed on a stock market, however, are permitted to trade on it. Even if a stock isn't listed on a reputable stock exchange, it can still be traded in an 'Over The Counter Market.' Companies can raise capital on stock exchanges, and investors can make informed judgments based on real-time market information about prevailing prices. A physical venue or an electronic trading platform can be used as an exchange.

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A stock exchange is a Self Regulatory Organisation (SRO) established to safeguard investors by laying down rules and regulations to ensure fairness, ethical conduct, and professional dealings.

Examples of few famous stock exchanges are the New York Stock Exchange (NYSE), London Stock Exchange (LSE), Australian Stock Exchange (ASX), National Association of Securities Dealers Automated Quotation (NASDAQ), Bombay Stock Exchange (BSE), National Stock Exchange (NSE), Frankfurt Stock Exchange (FRA), etc.

Investment Advisers

An investment adviser is a person or company that makes a living by giving financial advice to others or producing reports or analysis on stocks for a fee.  Assets advice can involve not just specific securities (such as stocks, bonds, mutual funds, limited partnerships, and commodity pools), but also market trends, the selection or retention of additional advisers, and reasons to prefer one investment avenue over the other (real estate or bitcoin or gold ETF.)

Credit Rating Agencies

Credit Rating Agencies offer analysis on a company's or security's creditworthiness. They use a grade to show the credit quality. Credit ratings typically differentiate between investment grade and non-investment grade securities. These organisations assist lenders and investors in determining the possible risk of lending money to a specific entity and assessing its ability to repay based on its previous credit payment records.

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Hedgers

Many businesses create a foreign currency based asset or liability in the ordinary course of operations. Importers and exporters in international trade, for example, may have open positions in many currencies. As a result, if the value of the foreign currency fluctuates, they may be impacted. Thus, hedgers take opposing positions in the market to protect themselves against these losses. So, if there is an unfavourable move in their original position, it is balanced out by the opposite move in their hedged positions. As a result, their earnings and losses are cancelled out, and their business operations are stable.

Central Bank

In the foreign exchange market, central banks are highly involved because they want a hold on the exchange rate of the nation's currency. Whenever the currency movement deviates away from a desirable range, the central banks intervene with measures like open market operation to attain the desired position. Similarly, if the nation's currency experiences an attack due to speculation, the central bank employs measures to defend the currency's position.