Who’s on the field?
So as a stock trader or investor, who are your potential customers in the stock market? For starters, other retail investors/traders – these are the smallest fish in the pond. Next, there are the institutional investors/traders representing an even broader category of skill levels and motives. On the institutional side of things you have anyone from small mutual funds and hedge funds to large or even behemoth players such as mega-mutual funds or endowment funds (such as university investment funds), pension funds (such as the Teacher’s Pension Plan) or sovereign wealth funds (funds managing an entire nation’s wealth). And then there are the seldom heard of market makers, the participants who “make the market” by being ready to buy or sell shares at a moment’s notice. It is important to know who your customer is probably going to be before you decide to buy a stock online.
The diversity of possible customers also means there are also different buying habits and different reasons for buying. For example, large mutual funds have lots of activities to try and coordinate and are complex to run. Recall that a mutual fund is a pooled amount of money usually managed by a team of investment professionals. Generally, each mutual fund agrees to follow specific rules that dictate how, when and where the fund can invest. This is known as their mandate. In one of our videos with Danielle Park of Juggling Dynamite, she gives viewers some great insight into why knowing the mandate of a fund is so important. Some mutual funds are also required to be “fully invested”, meaning they cannot have more than a certain portion of the fund in cash – it has to always have a certain percentage in stocks or bonds. This means that no matter the weather, some mutual funds are out buying stocks, even if those stocks are going down in value. When’s the last time walking off a cliff made sense, simply because you had to keep walking? In the world of mutual funds, some of them have to keep walking (read: investing) cliff or not.
One of the things experienced traders understand that beginner traders often get wrong is how to navigate around the other players on the field. For example, some mutual funds will not look at stocks underneath $5 because stocks under this arbitrary number carry increasingly higher amounts of risk (or so the story goes). Alternatively, if a mutual fund tried to purchase a significant amount of a “penny stock”, they could actually artificially drive up the price, and just like everyone else, if they needed to sell there would not be a customer large enough to take shares off their hands when the time came to exit.