A market is the combined behaviour of thousands of people responding to information, misinformation and whim – Kenneth Chang
I begin the second episode of The stock Market. In case you missed the first, a repeat of it is available here. Just like a Soap, you can easily follow through without having to refer to the previous episode and you will get what is going on but I recommend you have a look at the first part.
There are various participants of The Stock Market, and I outline a few of them here:
An Investor is an individual/Party that commits money to investment products with the expectation of financial return. Generally, the primary concern of an investor is to minimize risk while maximizing return, as opposed to a speculator, who is willing to accept a higher level of risk in the hopes of collecting higher-than-average profits. Stock investors are firms or individuals who purchase stocks with the intention of holding them for an extended period of time, usually several months to years. (Warren Buffett, a Master at this recommends holding a stock for not less than five years.) They rely primarily on fundamental analysis (we shall see about this later) for their investment decisions and fully recognize stock shares as part-ownership in the company. Many investors believe in the buy and hold strategy, which as the name suggests, implies that investors will hold stocks for the very long term, generally measured in years.
Stock traders usually try to profit from short-term price volatility with trades lasting anywhere from several seconds to several weeks. This is a practice heavily denounced by Buffett mainly because one loses in the long run in terms of brokerage fees etc.
A market Maker is a broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker immediately sells from its own inventory or seeks an offsetting order. This process takes place in mere seconds. Most stock exchanges operate on a “matched bargain” or “order driven” basis. In such a system there are no designated or official market makers, but market makers nevertheless exist. When a buyer’s bid meets a seller’s offer or vice versa, the stock exchange’s matching system will decide that a deal has been executed.
A Floor Trader is a member of a stock or commodities exchange who trades on the floor of that exchange for his or her own account. The floor trader must abide by trading rules similar to those of the exchange specialists who trade on behalf of others. These are the guys in the pit waving their arms frantically to make trades. However these men and women who still operate in an “open outcry” system are increasingly being replaced by automated trading systems and computers that function without human interaction and are specifically designed to match buyers and sellers.
A Floor Broker is an employee of a member firm who executes trades on the exchange floor on behalf of the firm’s clients. Basically, floor brokers receive orders from their firms, which have been placed by the firms’ clients, and executes these orders at the best possible prices. Floor brokers should not be confused with floor traders who execute orders for their own accounts.
A Broker-Dealer is a company or other organization that trades securities for its own account or on behalf of its customers. When executing trade orders on behalf of a customer, the institution is said to be acting as a ‘broker’. When executing trades for its own account, the institution is said to be acting as a “dealer.” Securities bought from clients or other firms in the capacity of dealer may be sold to clients or other firms acting again in the capacity of dealer, or they may become a part of the firm’s holdings. Although many broker-dealers are “independent” firms solely involved in broker-dealer services, many others are business units or subsidiaries of commercial banks, investment banks or investment companies. Look out for a continuation of The Stock Market in a few weeks’ time.
Quote: I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years – Warren Buffet.
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