There are several participants in the capital market for various reasons. It is a meeting place for participants who have enough resources and need to allocate them somewhere to gain a positive return. On the other hand, some entities (companies) need this capital to finance their company needs. As accurate as this definition may seem from various economic textbooks, it is just a very brief definition, and in my opinion, we cannot simplify it in this way. So let’s look at the individual market participants and their goals to know who is in the market and their intentions.
Investors – this group offers its resources to individual companies to acquire holdings, share dividends, or, in general, participate in the company’s growth and thus increase its wealth and assets. They run the risk of a partial or complete impairment of their investment. We will show later how we can eliminate this risk in the long run and with the appropriate selection of assets.
Traders – their goal is similar to hedge funds, namely the purchase or sale of assets with the aim of short-term appreciation with the help of appropriate risk management. Their trades last minutes, days, weeks, but also months. It depends on the specific strategy and approach of the individual.
Firms – firms demand capital from investors, but the fact that an investor buys the company’s shares on the stock exchange does not automatically mean that he has provided money to the firm. Investors bought the stock from a market player who wanted to get rid of the stock. Firms raise capital on initial (IPO) or secondary offering of shares to the market. If the trading volumes of a given stock on the stock exchange are significant and the company is in trouble, it may, in addition to the original IPO, offer to sell its shares or issue bonds. It will ensure the supply of liquidity, a new capital, which the company can continue to dispose of. However, companies tend to avoid this because it negatively affects the share price, while the company’s goal, in addition to the necessary operation, is to maximize profits for shareholders.
Hedge funds – the main reason is to look for various opportunities for capital appreciation on the capital or derivatives market. These players often have information or better education than other market participants and therefore know how to identify unique opportunities better. However, we cannot generalize because only a few dozen actively managed funds can beat the passively managed in the long run.
Governments issue bonds (from short-term to long-term, inflation-linked, etc.) through which they obtain additional liquidity to finance either investment activities in the medium or long term. Mainly they need to cover the state budget deficit. The yield depends on the current development of the yield curve, according to the length of maturity, the development of monetary policy as interest rates, and other factors (expectations, inflation, economy, state of public finances, etc.).
Central banks – this is a crucial player who acts, whether on the supply or demand side. However, central banks usually provide liquidity, meaning they can buy either corporate bonds (companies) or governments through various channels to influence the yield curve. Central banks even buy gold or foreign exchange reserves. We will give central banks a whole separate chapter.