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MENTORING - Fundamentals - Financial institutions - The Players - Coggle…
MENTORING - Fundamentals - Financial institutions
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The Players
Trading is like going to a war. You need to understand the players and the playground well before you begin your battle.
You need to understand the tools of the game. That we will understand tomorrow in Financial Instruments module.
There are two types of players in financial markets, especially equities.
The first one: non-leveraged players. These are the players who are not short of capital at any point in time. They have unending supply of money. Moreover they have a constant supply or float of money that is always in surplus to invest. So they are always looking for opportunities.
These non-leveraged players are the most powerful force in the financial markets. They can only move the market.
Who are these players and why they are called non-leveraged players. These players are basically asset managers, also called real money, because they put real money on the table to trade or invest.
Asset managers or real money are very large institutions that manage other people's money, either of individuals or other institutions. They constantly get money from individuals and institutions.
These asset managers are responsible for safely generating returns for individuals and institutions
OVER LONG TERM
. So, basically real money does not play over short term
However, to earn a small return from 'portfolio rentals', they use unlevered exposures to futures and options.
What are the institutions we are talking about? What are asset managers? Financial institutions, such as pension funds, insurance companies, endowment funds, sovereign wealth funds (SWFs), mutual funds and any other institution that manages money over long term for other people is called an asset manager.
Pension funds manager money for individuals or companies to manage pensions, which are a long term engagement.
Insurance companies take money from customers to give them sum assured when claimed. For this they have to invest the premiums in the financial markets to generate a good return.
Endowment funds, such as Harvard University Endowment, manage the fee received from students to generate return that can take care of the faculty pensions and also university maintenance.
SWFs invest the funds received from their governments in the financial markets to generate returns that can run the nations.
These asset managers or real money are called the
buy side
in investment banking or in financial markets. These people are a formidable force globally.
The buy side name comes from not buying securities. It comes from the fact that the buy side institutions buy trade
execution services
from the sell side.
These institutions are good at pooling the money and managing it. But how that money should be executed through trades in the markets is not their expertise.
They give that job to the sell side investment banks. The investment banks execute the deals for the buy side for a commision.
Sell side firms give market research as a fringe benefit to the buy side to get execution deals.
Who are leveraged players? All players who are not non-leveraged are leveraged players. They are always in need of money and take more risk than they can chew. They include speculators, hedge funds, quant funds, algo funds, retailers and anyone who needs more money to trade.
Why we prefer fundamentals? Because real money looks at only fundamentals and not technicals. It (sell side on behalf of buy side) looks at order flow for execution.