Market Participants
When a stock price jumps 5% in a single afternoon, it's tempting to imagine a crowd of ordinary people like you causing it — but the truth is that a small number of enormous players usually move markets far more than any individual ever could, and knowing who they are helps you understand whose money is actually behind the numbers you see.
Retail investors vs institutional investors
A retail investor is simply an individual person investing their own personal money, typically through a regular brokerage account — this is you, your parents, your teacher, anyone trading with their own savings. A retail investor's individual trade is almost always tiny relative to the overall market, whether it's $500 or $50,000.
An institutional investor is an organization that pools together and invests large sums of other people's money on their behalf — think pension funds, mutual funds, insurance companies, and hedge funds. Institutional investors collectively control the vast majority of money in most public markets; in the U.S., for example, institutions are estimated to own the large majority of total stock market value, with retail investors owning a much smaller share. This matters because institutional trading activity, not the collective decisions of individual retail traders, is usually what drives the biggest price movements in major stocks.
Pension funds, mutual funds, and insurance companies
These three types of institutions share a common feature: they manage extremely large pools of money on behalf of many people, which gives them outsized influence.
- Pension funds collect contributions from workers and employers throughout people's careers and invest that money for decades, so it can be paid out as retirement income later. Because their liabilities (future pension payments) are decades away, they can invest with a very long time horizon, and their sheer size — often managing billions or even trillions of dollars — means a single pension fund's decision to buy or sell a stock can noticeably move its price.
- Mutual funds pool money from many individual investors to invest in a diversified basket of assets, managed by a professional fund manager, giving ordinary retail investors access to diversification and professional management they couldn't easily replicate alone.
- Insurance companies collect premiums from policyholders and must invest that money so it grows enough to cover future claims, while also keeping enough of it safe and liquid to pay claims as they come in — a balancing act that shapes what kinds of assets they're willing to hold.
Their size matters for a simple reason: markets are, in aggregate, a reflection of where big pools of capital choose to flow. When a fund managing $200 billion decides to shift even 2% of its portfolio out of one sector and into another, that's $4 billion moving markets — far beyond what any number of individual retail investors trading a few thousand dollars each could replicate.
Hedge funds and their different incentives
Hedge funds are private investment funds, open only to wealthy individuals and institutions, that pursue more aggressive strategies than typical mutual funds — including borrowing money to amplify bets (leverage), betting that a stock's price will fall (short selling), and using complex instruments unavailable to most retail investors. What sets them apart most is their incentive structure: hedge fund managers are traditionally paid on a "2 and 20" model — a 2% annual fee on all assets managed, plus 20% of any profits generated. This creates strong pressure to chase high returns, since the manager's own paycheck depends heavily on performance, in contrast to a typical mutual fund manager, whose fee usually doesn't depend on beating the market by a wide margin.
Market makers, brokers, and custodians: who does what
Beyond the investors themselves, several other types of firms keep markets running smoothly, each with a distinct job:
| Role | What they actually do |
|---|---|
| Market maker | Continuously quotes buy and sell prices, providing liquidity so trades can happen instantly (see Lesson 2.2) |
| Broker | Executes trades on behalf of clients, connecting an investor's buy or sell order to the market (e.g. DBS Vickers, Interactive Brokers) |
| Custodian | Safely holds and records ownership of investors' securities, keeping them separate from the broker's own assets for safety |
These roles are often kept separate deliberately: if the firm executing your trade also held your assets with no independent record-keeping, there would be little to stop fraud or mismanagement. Regulation generally requires this separation of duties precisely to protect ordinary investors.
Why might a large institutional investor move a stock price just by buying it?
Reveal Answer
Because a stock's price at any moment reflects a balance between the shares people want to buy and the shares people are willing to sell at that price (see Lesson 2.2). A large institutional investor — say, a pension fund wanting to buy $500 million worth of a mid-sized company's stock — often needs to buy far more shares than are currently being offered for sale at the current price. To get all the shares it wants, it has to keep buying at progressively higher prices as the cheaper sell orders get used up, pushing the price upward simply through the mechanics of supply and demand. A retail investor buying $2,000 worth of the same stock would barely register, because that size can typically be filled at the existing price without needing to chase it higher. Size relative to the stock's normal trading volume — not identity or reputation — is what gives institutional investors this price-moving power.