Market Participants and Asset Valuation

In the last article I mentioned that the financial markets is simply made up of participants exchanging assets. Before we go further, keep in mind that everything that is traded in the financial markets is referred to as a financial instrument. You are not buying or selling anything physical, you're just buying or selling rights to the ownership of monetary assets. Stocks, bonds, currencies, commodities etc. are all financial instruments.

Now you may be wondering, how are these assets valued? Who decides what price Apple stock should be at? Who decides how much should a US Treasury bond cost? The answer is simple. The participants! Market participants can be broadly classified as retail traders, hedge funds, big banks, and lastly central banks.

1) Retail Traders

Retail traders are individual traders and investors who participate in the markets with their own money. They use their own strategies and financial knowledge to buy and sell financial instruments, hoping to profit.

2) Hedge Funds

Hedge funds are funds started and run by people who have a lot of knowledge, experience and a successful track record in the financial markets. They raise money from successful individuals and businesses, and then invest this money into the markets. If their investments are profitable, they get to keep a share of the profits. The biggest hedge funds in the world usually have tens of billions in assets under management (AUM).

3) Big Banks

Big banks is a term usually used to refer to investment banks. Some of the biggest investment banks are JPMorgan Chase, Goldman Sachs, Morgan Stanley etc. They offer financial services and investment opportunities to high net worth individuals and big businesses.

4) Central Banks

Central banks are the banks that are in charge of the monetary policies of their respective countries. They decide the guidelines for the commercial banks that operate in their country. In many cases, they are owned and run by the government.

The price market participants are willing to pay for a certain financial instrument, will be the price that shows up on your broker platform. Computer algorithms calculate this price by taking into account the demand, supply, and the rate at which buying and selling is taking place for a certain financial instrument. Keep in mind, the market isn’t always right. In fact real trading opportunities arise when financial instruments are either undervalued or overvalued by the market.

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