What you will learn
- Compare retail and institutional investors and explain why trade size matters
- Explain the roles of buy-side and sell-side firms
- Identify the main players: brokers, dealers, market makers, and regulators
- Identify who helps you trade and who may compete with you
People and institutions create market prices through their trades. They have different goals, budgets, and time horizons. One investor may save for retirement over several decades, while another firm may trade thousands of times in a second. Understanding these participants helps you work out who may be on the other side of a trade.
Market Participants & Roles
Meet the main groups that take part in financial markets and see what each one does.
Retail versus institutional
Retail investors are individuals who trade their own money, usually in smaller amounts. If you open a brokerage account for yourself, you are a retail investor. Institutional investors manage large pools of money for other people and account for most trading. A large institutional order can move the price, so the institution may split it into smaller orders and avoid showing the full plan to the market.
Key terms
- Retail investor
- An individual investing their own money, usually in small amounts.
- Institutional investor
- An organization that invests large pools of other people's money, such as a pension fund or mutual fund.
- Buy-side
- Firms that invest money to earn returns, such as asset managers and hedge funds.
- Sell-side
- Firms that serve the buy-side by executing trades, making markets, and publishing research, mainly banks and brokerages.
- Regulator
- A body such as the SEC that writes and enforces market rules to protect investors and keep trading fair.
Institutional investors include mutual funds and pension funds that invest for savers and retirees. The group also includes insurance companies investing premiums, university endowments, government-run sovereign wealth funds, and hedge funds using more flexible strategies for wealthy clients and institutions.
Buy-side versus sell-side
Buy-side firms manage money and invest it in securities. Asset managers and hedge funds belong to this group. Sell-side firms help those investors by executing trades, quoting prices, and publishing research. Investment banks and brokerages are common examples. The labels describe each firm's usual job, not which one happens to buy or sell in a particular trade.
Buy side vs sell side (Corporate Finance Institute)
Corporate Finance Institute separates firms that invest money from firms that serve investors. These labels describe ongoing roles, not one trade.
Other market specialists
- Market makers continuously quote a buy price and a sell price. They provide liquidity and try to earn the small gap between those prices across many trades.
- Broker-dealers execute client trades as brokers and trade for their own accounts as dealers.
- Proprietary and high frequency trading firms use their own money. They often use speed and automation to seek small, frequent advantages.
- Regulators such as the SEC set and enforce rules intended to protect investors and keep markets fair.
A later lesson looks more closely at brokers, dealers, and market makers. At this point, remember that these firms help other participants place and complete trades.
| Player | What they do | Buy-side or sell-side? |
|---|---|---|
| You, a retail investor | Invest your own money | Buy-side |
| Pension or mutual fund | Invest savers' money for the long run | Buy-side |
| Hedge fund | Invest client money with flexible strategies | Buy-side |
| Investment bank or brokerage | Execute trades, make markets, publish research | Sell-side |
| Regulator (SEC) | Set and enforce the rules | Neither, it oversees market participants |
Match the player to the description
Pair each market participant with what they do.
A market brings together long term savers, fast traders, and many investors in between.
Friend or competitor?
You build a quant strategy that buys a stock after good news, before the price has fully adjusted. A market maker quotes prices that let you trade. Which statement best describes the situation?
You rely on market makers for liquidity, and your potential edge comes from acting before slower participants have fully reacted.Where do you fit?
Which participant are you today, and which type of firm might you rely on to place your trades? Write two or three sentences placing yourself in the map above.
Write an answer before comparing it with the model response.
Model answer
I am a retail investor because I trade my own money in small amounts. I am on the buy-side because I invest to earn a return. A sell-side broker places my trades, and market makers quote prices that allow those orders to fill.
A quant may compete with some market participants and depend on others. Market makers provide the liquidity that lets a strategy enter and exit. Slower investors may create an opportunity if they have not reacted to new information. The next lesson examines the two prices these participants see on a quote: the bid and the ask.