Financial markets are a diverse community where each participant has his own goals and plays a specific role. Financial markets are like vibrant ecosystems where countless players interact with each other to buy, sell and exchange a variety of financial instruments. But do you know who exactly creates this ecosystem?

In this article, we will take a detailed look at the key participants in both the monetary and capital markets, highlighting their functions and contributions to the global financial system.

Primary market vs secondary market

The primary market is a platform where the initial offering of securities issued by companies to raise capital to finance their growth and development takes place. There are four key groups of participants in this market:

  • Corporations: issuers of securities seeking funds to implement their investment projects.
  • Institutional investors: pension funds, insurance companies, investment banks and other large institutions that purchase newly issued securities.
  • Investment banks: intermediaries that connect issuers and investors, advising on securities offerings, underwriting and marketing.
  • Auditing firms: independent companies that audit the financial statements of the issuer, thereby ensuring the reliability of the information provided to investors.

The interaction of these participants occurs as follows:

  1. The corporation decides to issue securities and hires an investment bank to place them.
  2. The investment bank assesses the company’s needs, develops a placement plan and finds potential investors.
  3. Securities are issued: investors purchase them from the corporation, investing in its development.
  4. An audit firm audits the issuer’s financial statements, confirming the accuracy of the information presented to investors.

The secondary market, in contrast to the primary market, is a platform where already issued securities are resold between investors. For example, equity securities are traded on a daily basis in stock markets, and most trading occurs between individual and institutional investors who own shares of publicly traded companies. Trading shares of Tesla, Microsoft or Apple doesn’t have much impact and doesn’t result in a direct flow of cash into the underlying firm. However, the information provided by such transactions is valuable because it represents a costly, public, real-time statement to investors about their perception of the firm’s value and a reflection of satisfaction and expectations.

Key players in this market include:

  • Individual and institutional investors: buy and sell securities on an exchange or over-the-counter market.
  • Exchanges: Organized venues where orders to buy and sell securities are collated, providing pricing and liquidity.
  • Dealers and Brokers: Professional market participants who buy and sell securities for their own account or for their clients, providing market liquidity.

Aftermarket functions:

  • Providing liquidity: Investors can buy or sell securities quickly and easily, making investments more attractive.
  • Pricing: Stock market quotations reflect the supply and demand for securities, serving as a guide for estimating the value of companies.
  • Risk management: investors can diversify their portfolios by redistributing assets between different securities.

Four key players in the primary market

Now we will take a closer look at the main institutions operating in the primary market.

Corporations

Within capital markets, corporations act as active economic agents that need to attract capital to ensure their growth and business activities. These companies may differ significantly from each other in terms of industry, business scale and geographic location.

Careers in capital markets corporations cover a wide range of areas, including:

  • Corporate development: developing a company development strategy, searching for new opportunities for investment and business expansion.
  • Investor relations: interaction with shareholders, financial analysts and other stakeholders, ensuring transparency and information availability of the company.
  • Financial planning and analysis (FP&A): forecasting the company’s financial performance, developing budgets, monitoring the implementation of financial plans, analyzing the effectiveness of investments.

Examples of large public corporations actively participating in the capital markets: Alphabet (Google), Amazon, Apple, ExxonMobil, Toyota.

Institutional investors

Within the capital markets, institutions, also known as buy-side fund managers, play a key role in allocating capital to corporations in need of financing and investors seeking income.

These institutions are represented by a wide range of participants, including:

  • Investment managers: professionals who manage investment funds, pension funds, insurance company assets and other funds of institutional and retail investors.
  • Institutional Investors: large institutions such as pension funds, insurance companies, investment banks and hedge funds that invest their clients’ funds in a variety of financial instruments, including stocks, bonds and real estate.
  • Retail investors: individuals who invest their savings in securities directly or through investment funds.

Investment banks

Acting as an intermediary, investment banks are hired to facilitate transactions between corporations and institutions. Here is the role of banks in the primary market:

  • Connecting investors and issuers: analyzing the needs and goals of both corporations and investors, selecting the most suitable transaction partners.
  • Ensuring underwriting: banks guarantee the purchase of securities from the issuer and subsequent resale to investors.
  • Advisory: providing advisory services to corporations on mergers and acquisitions, restructuring, IPOs and other strategic issues.
  • Securities trading: investment banks act as market makers, providing liquidity in the capital markets and buying/selling securities for their own account or on behalf of clients.

Examples of leading investment banks: Goldman Sachs, JP Morgan, Credit Suisse, HSBC, Morgan Stanley.

Public accounting firms

Audit firms, depending on their specialized divisions, can perform a wide range of functions in the primary capital market that go beyond the scope of traditional auditing.

The main activities of audit firms in the primary market:

  • Financial reporting: preparation, maintenance and consolidation of the issuer’s financial statements in accordance with national and international accounting standards.
  • Financial statement audit: independent verification of the reliability and accuracy of the issuer’s financial statements, ensuring their compliance with applicable rules and regulations.
  • Tax services: advising the issuer on tax issues, optimizing its tax obligations as part of the placement of securities.

Examples of leading audit firms: Deloitte, PwC, Ernst & Young, KPMG, Grant Thornton.

Key players in the secondary market

Unlike the primary market, where an initial offering of debt or equity is carried out to raise capital, the secondary market ensures the circulation of already issued securities. In other words, it is a platform where the purchase and sale of previously issued bonds and shares takes place. Let’s take a closer look at the main players in the secondary market.

Buyers and sellers

In the secondary securities market, in contrast to the primary market, where the issue is carried out directly by the issuer, buyers and sellers directly interact with each other. These can be fund managers or any other investors interested in purchasing securities or debt.

To carry out purchase and sale transactions, securities must be admitted to trading on a specific platform. Such a platform can be a stock exchange, which provides organized trading, or an over-the-counter (OTC) market, where transactions are concluded directly between participants.

The market price formed on the secondary market reflects the real relationship between supply and demand for certain assets, serving as a guide for market participants.

Investment banks

Investment banks, in addition to participating in the initial placement of securities, play an important role in ensuring the functioning of the secondary market. They act as transaction catalysts, speeding up the process of buying and selling already issued bonds and shares between investors. Investment banks, acting as market makers, ensure a constant presence in the market, buying and selling securities for their own account. This makes the market more liquid, allowing investors to transact quickly and easily.

Dealers

Financial dealers are a special category of securities market participants who operate by owning their own portfolio of assets. Dealers aren’t just looking to make a profit on their investment. Their main task is to create a market, ensuring constant readiness to buy and sell securities at market prices. Dealers do not hold securities in their portfolios for long periods of time. They buy assets to resell them as quickly as possible, making money on the difference between the purchase and sale prices.

Dealers are always ready to buy or sell securities, allowing investors to complete transactions quickly and smoothly. Particularly in the United States, dealers are strictly regulated by the Securities and Exchange Commission (SEC). Dealers are required to promptly and accurately execute orders to buy and sell securities placed by customers.

Brokers

In the secondary securities market, brokers act as intermediaries, bringing together buyers and sellers to conclude transactions.

Unlike dealers, who trade securities from their own portfolio, brokers act solely in the interests of their clients. Brokers traditionally receive a commission for their services.

Depending on the range of services provided, brokers in the securities market are divided into two categories:

  • Discount brokers: provide basic services for executing client orders for the purchase/sale of securities. They typically offer lower commissions than full service brokers.
  • Full service brokers: in addition to executing orders, they provide a wide range of additional services, such as investment advice, pension planning, portfolio management. Full service brokers’ commissions and fees tend to be higher than discount brokers.

Financial intermediaries

Financial intermediaries, such as commercial banks and mutual fund investment companies, play an important role in the modern economy by acting as a liaison between the various parties to transactions. They streamline asset exchange processes, making them simpler and more efficient. Financial intermediaries accumulate funds from investors and depositors. Raised funds are used to lend to borrowers, finance projects or purchase securities. Financial intermediaries can transform risks by offering investors lower-risk instruments than they could purchase on their own.

By combining small transactions into large ones, intermediaries optimize costs, making transactions more accessible to market participants. Financial intermediaries collect and disseminate information about investment opportunities, reducing information asymmetries between investors and borrowers.