Who Are the Participants in the Stock Market? How Do Retail Investors, Institutions, and Market Makers Influence the Market?

TradingKey - In the stock market, thousands of trades occur every day, driven by various types of participants working together.

So, who are these participants in the stock market? How do their actions influence price movements and market stability? Let’s explore this together.

Individual investors, often referred to as retail investors, participate in the stock market as individuals using their own funds to buy and sell stocks.

Can retail investors really influence the market, or are they just "small fish"?

While the capital of a single retail investor is usually limited, when a large number of retail investors act simultaneously, they can have a significant impact on the market.

(Source: Freepik)

For Example, The GameStop Incident in 2021

At that time, a group of retail investors banded together on the Reddit forum to aggressively buy GameStop stock.

This led to a rapid surge in stock prices that caught short-selling institutions off guard.

This "retail uprising" not only shocked Wall Street but also demonstrated to the world the power of collective action by individual investors.

Despite occasional waves created by retail investors, they often find themselves at an informational disadvantage.

For instance, in 2025, when Trump tweeted "This is a great time to buy!" while referencing his company's stock code "DJT." This tweet ignited a 2,960-point surge in the Dow Jones on that day. However, it was later revealed that Trump’s family fund had already positioned itself for short options on NASDAQ with profits exceeding $30 billion. This kind of “collusion between power and capital” leaves retail investors disproportionately weak in information battles.

What Are the Investment Characteristics of Individual Investors?

Capital and Allocation

As an individual investor, you may find your available funds limited compared to institutions that can diversify across sectors and asset classes.

Under such circumstances, many people choose to concentrate their investments in small-cap stocks or trending targets because they seem more capable of generating quick profits.

Decision-Making Drive

A prominent characteristic of individual investors is their subjective investment approach; they can be heavily influenced by emotions, peers, or unverified news.

A common behavior is "buying high and selling low" — following trends during market rises increases prices; conversely, panicked selling during downturns exacerbates volatility.

Information and Strategy

Individual investors typically rely on social media and financial news for information; however, these sources often lack depth or may even be misleading.

Additionally, most individual investors lack sophisticated investment strategies and analytical tools — they tend to make decisions based more on instincts or simplistic technical analysis.

Trading Habits

Individual investors often focus more on short-term price fluctuations, hoping to profit from buying low and selling high through frequent trades.

However, this high-frequency trading approach commonly backfires. Due to insufficient professional analytical tools and experience, many individual investors incur losses from judgment errors while each trade incurs transaction fees; frequent trading can lead these costs to accumulate significantly, further eroding profits.

What Role Do They Play in the Market?

Although individual investors typically command smaller amounts of capital individually, their numerous trading activities play an essential role in providing liquidity in the market.

Liquidity Support

When there are ample buyers and sellers present in the market, stock transactions flow more smoothly—prices then better reflect real supply-demand dynamics.

In other words, it is because individuals like you participate that markets become livelier.

Small-Cap Stock Driving Effect

Individual investors tend to pay closer attention to small-cap stocks since these stocks have smaller float sizes, making them more susceptible to pressure from fund inflows.

While your investments may be diversified across different companies, if a large number of retail traders concentrate their buying efforts into any given small-cap stock, this could substantially affect its price.

In the stock market, there exists a group referred to as "institutional investors," who are the "big players." With their substantial capital and systematic research capabilities, they become key participants in market pricing and resource allocation.

(Source: Freepik)

What Are the Core Advantages of Institutional Investors?

Information and Research Barriers

Compared to individual investors, institutional investors have a significant information advantage. They not only subscribe to professional financial data services that provide vast amounts of macroeconomic data, industry statistics, and company financials but also possess specialized teams and advanced technologies that allow for rapid and effective analysis of this information.

Diverse Strategies and Risk Control

Institutional investors place great emphasis on diversified investment strategies — simply put, they do not "put all their eggs in one basket."

•  Diversified Asset Allocation

They do not limit their investments solely to stocks; instead, they distribute investments across various sectors (technology, consumer goods, finance), bonds, and alternative investments (real estate, private equity).

This approach ensures that even if one sector underperforms, gains from other areas can compensate for the losses.

•  Diverse Investment Methods

In addition to traditional long-term investing, institutional investors employ a variety of complex strategies.

For instance, hedge funds reduce risk and seek returns by simultaneously buying and selling related financial instruments.

Additionally, some institutions participate in special investment opportunities such as stock placements or mergers and acquisitions to pursue higher returns.

Long-Term Capital Characteristics

Institutional investors typically have a long-term investment orientation — especially entities like pension funds. Their funding sources are primarily directed toward meeting long-term financial objectives such as providing pensions for retirees.

Consequently, they tend to focus more on the long-term value of companies rather than short-term price fluctuations.

What Market Impacts Do They Have?

Stabilizing Role

Institutional investors play a critical role in the market; their investment actions help stabilize markets and reduce short-term volatility.

Value Discovery

Utilizing their professional research and analytical capabilities allows institutional investors to more accurately assess corporate value and prospects — they direct funds toward businesses with strong growth potential and profitability thereby promoting efficient resource allocation, which drives economic development.

Efficiency Enhancement

The trading activities of institutional investors enliven markets while increasing liquidity.

Moreover, their professional investment decisions and risk management also contribute significantly to enhancing overall market efficiency and transparency.

Typical Types of Institutions

Market makers connect buyers and sellers by continuously providing bid and ask quotations, maintaining trading continuity, and serve as indispensable core infrastructure in modern financial markets.

What Are the Core Functions of Market Makers?

Two-Way Quote Mechanism

The most prominent feature of market makers is their continuous provision of two-way quotations for the market.

Simply put, they simultaneously quote the price at which they are willing to buy a stock (bid price) and the price at which they are willing to sell (ask price), and commit to trading a certain quantity at these prices.

Suppose a stock’s bid price is ¥10.00 and ask price is ¥10.20. This means:

• If you want to sell the stock, you can sell it to the market maker at ¥10.00
• If you want to buy, you can purchase it from the market maker at ¥10.20

This two-way quotation mechanism provides the market with a clear price reference range, ensuring investors can always find buy/sell prices whether the market is active or quiet.

Order Processing & Inventory Management

Market makers are not only responsible for quotations but also need to:

• Process investor orders in real-time

Equipped with professional trading systems to rapidly respond to market changes and efficiently handle large order volumes.

• Manage securities inventory

To meet buy/sell demands, market makers must hold a certain quantity of securities inventory.

• When buy demand increases, they reduce inventory

• When sell demand increases, they replenish inventory

What Technical Advantages Do They Offer?

Information Hub Role

Market makers occupy an information hub position in the market. Through professional channels and acute market sensitivity, they comprehensively gather trading information from all directions—from subtle investor buy/sell intentions to overall order flow changes.

Trade Execution Capability

Market makers not only possess cutting-edge trading systems but also have a team of experienced, highly professional traders.

This powerful combination grants them unparalleled trade execution capability, enabling rapid quote adjustments and trade completion when market prices change.

How Do They Impact the Market?

Price Stabilization

Market makers play a crucial role in stabilizing price fluctuations. When market buy/sell orders become imbalanced, they leverage their capital and securities inventory to promptly handle large orders and regulate supply-demand relationships.

For example:

If demand for a stock suddenly surges, causing rapid price increases, market makers increase selling volume to suppress excessive price rises.

Similarly, when sell pressure becomes excessive, market makers increase buying volume to prevent severe price declines.

Suppressing Speculative Hype

Multiple market makers holding positions in the same stock also constrain speculative activities to a certain extent. Due to market makers’ presence, market prices trend toward rationality, reducing price bubbles caused by short-term speculation.

Risk Warning for Market Makers

Although market makers play a vital role in the market, they are not without risks.

To meet market buy/sell demands, market makers must hold a certain quantity of securities inventory.

However, with frequent market price fluctuations, if market makers misjudge market trends and hold excessively high-priced inventory, when market prices fall, the inventory value will significantly shrink, causing market makers to incur losses.

In the stock market, retail investors, institutional investors, and market makers—different participants interact and collectively construct a dynamic environment full of variables.

Among these participants, there are significant differences in risk preferences, investment strategies, and reactions to market changes. The group sentiment tendencies of retail and institutional investors intertwine with the liquidity provided by market makers, directly influencing securities market pricing.

This market feedback loop profoundly reflects the complex variability of investor psychology and the elusive nature of market trends, also highlighting the critical importance for all market participants to maintain rationality, obtain sufficient information, and make wise judgments when making decisions.