Market Participants in financial markets

Raising Money
The key agents looking to raise money are:
1. Private sector institutions - 
2. Governments - 
3. Supernatural entities - 


Using Money

The key agents who invest money in the financial markets are:

• Fund managers
• Corporates
• Individuals

We look into them 1 by 1.


Fund managers
The major class of funds are :

• Collective investment schemes
• Investment trusts
• Mutual funds/Unit trusts
• Pension funds
• Hedge Funds

Investment Strategies
If you are considering investing in the stock market or you have been investing for retirement, you've no doubt considered the merits of active vs. passive investment strategy. Before you know which is best for you, you must determine your long-term goals and your investing strategies. Ask yourself what you hope to achieve through your investments, how much effort you want to put into choosing stocks and how much risk you can handle.

Passive Investing
If your answers to these questions suggest that you are risk-averse, you're either not passionate about investing in the stock market or your main goal is investing for retirement. In this case, a passive investment strategy may make sense for you. In theory, passive investing generally delivers a nice return over a longer period of time. It's based on the assumption that the stock market tends to move upward over the long-term, meaning prudent investments may be more likely to pay off. Passive investing requires very little direct management and is generally lower risk.

Active Investing
Active investing, on the other hand, seeks to maximize short-term stock market fluctuations. As an active investor, you try to exploit the minor ups and downs in the market, buying stocks that drop and selling them when they go up again. It takes more of your time to manage active investments and requires a degree of judgment and skill. If you have trouble understanding how the stock market works, active investing may not be for you. Also, since the potential pay-off is larger, it carries greater risk.

Risk Applies to Both Types
Even if you are a passive investor, you are still vulnerable to the fluctuations of the market, and there is no such thing as a risk-free investment. But you can take steps to reduce your risk. Remember to select those stocks that seem best able to increase steadily over the long term. You should not expect sudden high returns, and these stocks may not be as glamorous. You should also diversify your investment portfolio. That way, if one company or one sector in which you invest faces trouble, your portfolio will take less of a hit since you have invested in other sectors as well. Last of all, consider adding such relatively lower-risk investment instruments as bonds.

Collective Investment schemes
In this case, a person invests money on different products in the market.

There are 2 main Collective Investment schemes :

Open Ended Investment schemes
Each time money is invested, new shares or units are created to match the prevailing share price; each time shares are redeemed, the assets sold match the prevailing share price. In this way there is no supply or demand created for shares and they remain a direct reflection of the underlying assets.


Closed ended Investment schemes

A closed-end fund issues a limited number of shares (or units) in an initial public offering (or IPO). The shares are then traded on an exchange or directly through the fund manager to create a secondary market subject to market forces. If demand for the shares is high, they may trade at a premium to net asset value. If demand is low they may trade at a discount to net asset value. Further share (or unit) offerings may be made by the scheme if demand is high although this may affect the share price.

The added element of market forces tends to amplify the performance of the fund increasing investment risk through increased volatility.

Pension & Hedge Funds
Most private-sector pension plans are funded; contributions are invested in various financial assets so as to generate future returns. The process is guided by advice from actuaries who estimate the required returns. Individual pension plans have single or multiple fund managers who conduct transactions in the financial markets so as to generate appropriate future wealth.

Hedge funds operate in multiple market sectors. They are generally investment vehicles that utilize aggressive or risky strategies in an attempt to generate returns above those usually observed in financial markets. For instance, the preferred strategy of a fund might be to generate profits through sophisticated derivative transactions. These 'risky' funds are generally the preserve of wealthy individuals and institutions, and regulatory codes often prohibit retail investment. Most hedge funds set extremely high minimum investment amounts, ranging anywhere from USD 250,000 to over USD 1 million. Investors in hedge funds pay a management fee, but it is usually higher than fees that would be paid to a conventional mutual fund/unit trust. Additionally, hedge funds also collect a percentage of any profits (usually 20%).

Corporates
Not all corporates are looking to borrow money at all times. Sometimes, a corporate will have a cash surplus which it is looking to invest in the markets.
Predominantly, corporates aim at investing in short-term assets, but they may also invest in the equity markets and take 'stakes' in other firms.


Individuals
Individual (retail) investors are increasingly choosing to make investments through mutual funds, ETFs, and other pooled/collective investment vehicles, which means that the sector's share of direct investment in some markets has shown a declining trend in recent years. For instance, it was estimated that retail investors ownership of publicly-traded stocks in the US stood at more than 90% in 1950 – institutional ownership was practically irrelevant. However, at the end of 2008, household ownership of corporate equities had declined to 36%*.

It is important to note that this trend, sometimes referred to as deretailization, does not mean that individual investors have left the markets altogether. As mentioned above, a large number are now investing indirectly through various collective investment vehicles (many of which did not even exist back in 1950). For example, mutual funds' holdings alone of corporate equities in the US stood at 19% at the end of 2008* and, according to the Investment Company Institute (ICI), some 82% of total mutual fund assets were held by households at year-end.

*Source: Federal Reserve – Flow of Funds Accounts (Fourth Quarter 2008)

Market Intermediaries
Borrowers and investors may not come into direct contact with each other. A company raising money through issuing bonds will not usually sell the bonds directly to end investors. Instead a financial institution will act as an intermediary – an underwriter; the company will sell the bonds to the institution at a pre-agreed level. The institution in turn sells the bonds to end investors – hopefully for a higher price. In the secondary market, the intermediation is even more pronounced. A government will not typically act as a buyer and seller of outstanding government securities. Instead investors will look to buy and sell assets from a financial institution that makes markets in the appropriate assets.

Historically market intermediaries have been segregated by function according to government regulation. For instance, for a long time it was illegal for a financial institution in the United States to both lend money and simultaneously transact in the equity markets. In many jurisdictions this has led to a distinction between commercial banks, specializing in lending products, and investment banks, who act predominantly in securities markets. However, these distinctions are increasingly less marked as the relevant regulations are dismantled. In major jurisdictions today, it is generally possible for a financial institution to operate in multiple market sectors.

Some more points we have to understand
Regulators
Securities