4. Who takes part in the market: the players on the board

Theory 1: How the market really works

A private investor with 2,000 euros and a pension fund with 200 billion buy the same share, on the same day, in the same market. They are not playing the same game.

So far we have talked about the market as if it were an abstract mechanism where 'supply' and 'demand' collide on their own. In reality, behind every buy or sell order there is a specific participant, with their own objectives, their own time horizon and their own resources.

Understanding who is on the other side of each trade matters as much as understanding the price mechanism.

Retail investors: many, but small

The largest group by headcount, though not the one that moves the most money in aggregate, is retail investors: individuals investing their own money, usually through an online broker.

Their amounts range from a few euros to, in some cases, several million. They have grown enormously over the past two decades thanks to platforms that have all but eliminated commissions and entry barriers.

But there is a caveat worth accepting early: individually, their ability to move the price of a large company is almost always negligible.

Institutions: few, slow and enormous

At the other extreme are institutional investors: pension funds, mutual funds, insurance companies, family offices and sovereign wealth funds. They manage the money of thousands or millions of people in aggregate.

The scale changes completely. A single pension fund can move more money in one trade than all the retail investors in a country put together move in an entire day.

Their time horizon tends to be long, years or decades, because they are managing future retirements. And their decisions, though slow, generate very significant price moves when they enter or exit a large position.

Hedge funds: where almost everything you will see comes from

In between, and playing a very different role, are hedge funds: investment vehicles normally reserved for large and sophisticated investors. They pursue active returns using more aggressive and varied strategies than a traditional fund:

• Leverage.
• Short positions: betting that a price will fall.
• Derivatives.
• Algorithmic trading.

This is worth holding on to. Many of the strategies this course will explain across the following levels are, in origin, techniques developed and refined by quantitative hedge funds.

Market makers: the player nobody mentions

There is one type of participant rarely mentioned outside technical circles, but which is essential for everything above to run smoothly: market makers.

Their job is not to 'bet' on the price going up or down. It is to constantly quote both a buying price and a selling price for an asset, earning the small difference between the two: the spread. We will cover it in detail in the next level.

In exchange for that spread they take on a specific risk: that of always having someone available to buy from you or sell to you.

Thanks to them, an ordinary investor almost never has to wait hours to find someone to buy or sell a share of a large company. In the background there is always a market maker willing to be the counterparty, even if only for a few seconds until whoever really wanted that position shows up.

The broker: the compulsory door

Neither retail nor institutional investors trade directly on the exchange. They all have to go through a broker: the authorized and regulated entity that connects its clients' orders to the market.

It is worth being clear about what it does and does not do. The broker does not set the price nor decide whether your order is filled, that is determined by the market itself, as we saw in the previous module. It is responsible for three things:

• Transmitting your order correctly.
• Safeguarding your assets.
• Complying with the applicable rules.

Precisely because it holds other people's assets, a regulated broker is required to keep client shares and cash separate from its own balance sheet.

The consequence matters, and it matters a great deal. If the broker went bust, your shares would not be part of the pool distributed among creditors, because they were never legally the broker's. It only held them in custody.

The regulator, and why it holds everything else up

And speaking of rules: none of this ecosystem works without a regulator making sure they are followed.

In the United States that role falls to the SEC (Securities and Exchange Commission). It requires listed companies to file periodic and truthful financial reports, pursues insider trading, and supervises brokers and exchanges. Those same reports, incidentally, are the ones that feed this platform's honest data engine. In Spain, that role belongs to the CNMV.

Without a regulator enforcing transparency, no participant — retail or institutional — could trust that the price they see reflects real, unmanipulated information. The whole edifice we have built in this level would collapse.

What comes next

That closes the first level. You now know what a share is, what the stock market is, why the price moves and who takes part in the game.

In the next level we get into more operational territory: exactly how a share is bought and sold, and what types of orders exist. We will also settle what this spread and order book business we left pending is all about.