- Value - Investors must consider whether a company's shares represent a good value. For example, if two similar companies are trading at different earnings multiples, the lower one might be the better value because it suggests that the investor will need to pay less for $1 of earnings when investing in Company A relative to what would be needed to gain exposure to $1 of earnings in Company B.
- Success - Investors must measure the company's future success by looking at its financial strength and evaluating its future cash flows.
- Investment Banks - Investment banks are the organizations that assist companies in going public and raising money. This often involves holding at least a portion of the securities over the long term.
- Mutual Funds - Many individuals keep their money in mutual funds, which make long-term investments in companies that meet specific criteria. Mutual funds are required by law to act as investors, not traders.
- Institutional Investors - These are large organizations or persons that hold large stakes in companies. Institutional investors often include company insiders, competitors hedging themselves and special opportunity investors.
- Retail Investors - Retail investors are individuals that invest in the stock market for their personal accounts. At first, the influence of retail traders may seem small, but as time passes more people are taking control of their portfolios and, as a result, the influence of this group is increasing.
- Price Patterns - Traders will look at the price history in an attempt to predict future price movements, which is known as technical analysis.
- Supply and Demand - Traders keep close watch on their trades intraday to see where the money is moving and why.
- Market Emotion - Traders play on the fears of investors through techniques like fading, where they will bet against the crowd after a large move takes place.
- Client Services - Market makers (one of the largest types of traders) are actually hired by their clients to provide liquidity through rapid trading.
Who Are the Major Traders?When it comes to volume, traders have investors beat by a long shot. There are many different types of traders that can trade as often as every few seconds. Among the most popular types of traders are:
- Investment Banks - The shares that are not kept for long-term investment are sold. During the initial public offering process, investment banks are responsible for selling the company's stock in the open market through trading.
- Market Makers - These are groups responsible for providing liquidity in the marketplace. Profit is made through the bid-ask spread along with fees charged to the clients. Ultimately, this group provides liquidity for all the marketplaces.
- Arbitrage Funds - Arbitrage funds are the groups that quickly move in on market inefficiencies. For example, shortly after a merger is announced, stocks always quickly move to the new buyout price minus the risk premium. These trades are executed by arbitrage funds.
- Proprietary Traders/Firms - Proprietary traders are hired by firms to make money through short-term trading. They use proprietary trading systems and other techniques in an attempt to make more money by compounding the short-term gains than can be made by long-term investing.
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