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Participants play an important role in Trading. Without the participants, trading cannot happen in the first hand. Here tradingcritique.com gives you the 14 essential participants required to trade in any Financial market. The participants who are involved in all the types of trading and Financial markets are consolidated and given here. After reading this article you will get clarity about all the participants who are involved in the financial trading field.
To increase the understandability of this article, we recommend that you should read our other articles on Trading: All you need to know about and Financial Markets.
The participants are people or institutions who are involved in the Financial markets to execute the functions of Financial trading in some or the other way. Each and every participant is important as their function is essential for the proper working of the Financial trading system.
Each participant has their own function to execute. If one of the participants does not work properly it disturbs the balance of the whole trading mechanism. So, to maintain proper balance in the financial trading environment each participant must work properly. This makes all the participants to play an essential role in financial trading.
Trading Critique explains about the 14 Essential participants involved in Financial trading, which are as follows,
Sellers are the ones who predict that the market value of a particular financial instrument is going to reduce. So, a seller will place a trade to sell. Sellers are called as Bears. When there are more sellers in the market than the buyers then the market is said to be Bearish.
Buyers and Sellers both influence the market price by balancing Demand and Supply in the market.
An investor can be a person or institution who buys and sells financial instruments. An investor can act as both a buyer and a seller. There is only a small difference between an Investor and a trader.
An investor holds the financial assets for more than a year to get profits at a later period, whereas a trader holds the financial assets less than a year, even less than a day to obtain small profit through the small price changes in the value of financial assets.
Some Examples for investors are retail investors, retail traders, mutual funds, banks, insurance companies, pension funds, etc.
Exchange is the centralised and regulated platform or place where the buying and selling of financial securities take place. There are different types of exchanges in accordance with what type of security is traded, such as the Stock Exchange and Commodity Exchange.
Some famous examples of exchanges are the New York Stock exchange, London Stock Exchange, London Metal Exchange, etc.
The best example is the Wall Street image where the Brokers shout at each other to find a perfect buyer and seller to execute a trade. This is called the Open Outcry process.
Now the exchanges are completely automated although some exchanges follow the Open Outcry system even now.
A Dealer is a person or a firm who buys and sells financial instruments for their benefits. A dealer firm may buy many stocks from an exchange and sell them to the investors directly. Dealers execute their trades as a business. They act as the counterparty for both the buyers and sellers. Dealers play an important role in Over-the-counter platforms determining the ask prices and bid prices for the securities.
Nowadays mostly the firms act as both the Broker and Dealer. Some examples of Broker-Dealer are TD Ameritrade, Charles Schwab, Robin Hood, etc.
Over-The-Counter (OTC) platforms are trading platforms which aren’t connected to exchanges. OTC platforms are decentralised, and the trading happens on a bilateral basis.
OTC platforms are regulated by various regulatory bodies such as Financial Industry Regulatory Authority (FINRA), for the USA and The Financial Conduct Authority (FCA) for the U.K. OTC Bulletin Board and OTC Link LLC are the Inter-Dealer quotation system provided by the authorized OTC Broker-Dealers under FINRA.
OTC provides trading of various financial instruments in a single platform like the trading of stocks, commodities, currencies can happen in the same OTC platform. Whereas while trading in exchanges we need to go to different exchanges to trade in different financial securities, such as the Stock Exchange and Commodity Exchange. Some Broker-Dealer Platforms also act as OTC platforms.
Financial instruments that are not traded in exchanges are available in OTC platforms. For example, private companies that are not qualified to list in exchanges can be traded in OTC.
Mostly different types of Derivatives trading happen in OTC platforms such as the Contract For Difference (CFD), spread betting which isn’t available in exchanges.
Over the years governments of various countries are taking steps to regulate OTC trading through Central Clearing Party (CCP) platforms. CCP platforms were introduced after the Basel III norms. Some standardized derivatives are centrally cleared.
OTC platforms are not regulated as that of exchange and it has some risk involved such as the counterparty risk.
A Financial market is a market where the exchange of financial services takes place. But mostly the exchange of Financial assets is considered in priority in Financial markets. The financial services like Banking, Consultancy and Advisory services are also provided in the Financial markets.
If any kind of Financial trading takes place anywhere in any form, the physical or the online platform where trading happens becomes the Financial market.
The types of Financial markets are,
As discussed above, Broker platforms, Dealer platforms and Broker-Dealer Platforms can also be mentioned as Financial markets. These markets are differentiated according to the kind of participants involved in it. All other participants mentioned in this article can also be said as the participants of the Financial market.
To know in detail about the Financial Markets read our article Financial Markets: Easily understand its Functions, Types, Participants, Regulations, Process. You will get all the information you need about the Financial Markets such as their Function, Financial Instruments involved, Institutions involved, Regulatory bodies who regulate these Financial Markets in various Countries and the Brief of its working and process.
Many financial institutions are involved in trading. They invest the money of their clients in bulk in buying the financial securities.
Some financial institutions act as Financial Intermediaries such as the Investment banks executing the process of underwriting and also provide advisory and consultancy services for both investors and issuers.
A Market maker is a person or a firm or a financial institution which helps in making the financial markets more liquid. They are ones who buy financial instruments in bulk and sell them when needed. So, when the individual investor wants to buy or sell financial instruments, Market maker becomes a seller and buyer respectively of that financial instrument.
Market makers function to make the demand and supply balance in the financial markets. The profits the market makers make are from the Spread amount between the buying and selling price of the financial instruments. Brokers and Dealers can also act as Market makers. Mostly, big financial institutions act as major Market makers such as Deutsche Bank, Morgan Stanley, BNP Paribas, Goldman Sachs, etc.
The complete process of Financial trading is regulated by governments through various Regulatory bodies. These Regulatory bodies monitor the trading to happen more Transparently and Legally. All the participants in trading platforms are regulated by the regulatory bodies. Every country has its own regulations and regulatory bodies. When investors and traders trade unknowingly in unregulated trading platforms, they lose their money.
Some examples of regulatory bodies of some Countries are listed below,
Participants in Trading are so important because without their presence trading cannot happen. Without basic participants like Buyers and Sellers, trading can never be executed. A trader should understand the importance of all the participants mentioned above as a piece of basic knowledge. Knowing about the participants should be a part of your Trading Plan and Trading Strategy. This gives clarity for you about who are the people and institutions you are dealing with in your trading. When you understand about the participants you can differentiate between legal trading and scams.
This article gives you a basic understanding of the participants involved in trading. If you have any queries related to the participants involved in financial trading, you can comment below or ask your questions personally to our Trading Critique Experts by clicking here. To get more updates from tradingcritique.com, Subscribe to our Newsletter. Check our other sections and Broker reviews to keep yourself updated and expertise in trading.
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