The Players

Know yourself, know your enemy and you can fight a hundred battles and win a hundred battles. This timeless quote from Sun Tze holds true for players in the stock market as well. (I also got a bit of ink lah!) Although a true value investor (see also value investing) would not worry about matters other than those that are related to the intrinsic value of the company, one must be mindful of the forces that move stock prices. This would allow us to buy a good company at cheaper prices and also help us determine when to take profits.

As a basic introduction, here is a (non-exhaustive) list of players in major markets

1) Institutional investors (mutual funds, pension funds, etc)

2) Hedge funds (Macro, long-short, long-only, arbitrage, quant)

3) Brokers (Investment banks, traders, investment arm)

4) Retail investors (rookies, day-traders, investors)

To give you flavour, for a moment let's think of Zouk as the market, then the discription becomes

1) The incumbents, always around, deep, skilful, in control

2) New kids on the block, funky, attention seeking and scoring big

3) The pimps, gd at managing relationships & taking commissions
4) Participating on the sidelines, usually at the losing end

Institutional investors continue to be the major class of investors in the world. They usually invest in benchmarks (like STI, S&P or Nikkei) and their investment activities revolve around their benchmarks as well. Hence on average they are the trend-followers rather than the trend-leaders. Of course there are the top fund managers who can identify trends way before everyone else. But when the majority follows a trend, they move markets big time.

Perhaps the most important takeaway is that hedge funds have become a major force in the markets. Hedge funds are usually small investment outfits that invest with radical strategies to make a lot of money with leverage. Hence the name "hedge fund" is actually a misnomer. Hedge funds take a lot of risk to produce their desired return. They are responsible for a lot of volatility in stock prices nowadays and they are increasing their asset under management, for better or worse.

See also Securitizing yellow-top taxis

and Brokers cannot be trusted