Investment banks
hedge funds
asset managers
wealth managers
retail investors

Explaining 5 Powerful Players Who Can Impact the Markets

Investment banks, hedge funds, asset managers, wealth managers and retail investors are all powerful players who can impact the markets. By understanding the difference between these market-moving institutions and individuals, kids and parents gain valuable insight that will bolster their financial literacy skills and prepare them for future financial success.

• Investment Banks
  
  Unlike commercial banks where people go to open checking or savings accounts, investment banks are large financial institutions typically involved in complex financial transactions such as initial public offerings, mergers and acquisitions, and raising equity or debt capital.
  
  Another important area of business for an investment bank is its Sales and Trading division. Once stocks and bonds come to public markets, the Sales and Trading division sets the prices and provides liquidity for assets for institutional investors. Some well-known investment banks include Goldman Sachs and Morgan Stanley.
  

• Hedge Funds
  
  Hedge funds are a pooled investment structure run by an investment advisor or money manager that is designed to have high returns. A hedge fund is a financial institution that historically offers investment returns that are uncorrelated to the traditional stock and bond markets. They are able to achieve these returns by engaging in more complex transactions such as short selling, or selling shares they do not own, and buying and selling complex options and derivatives.
  
  Hedge funds typically charge their investors a 2% management fee and an additional 20% fee on all profits. Historically, only high net worth individuals, pension funds, and insurance companies (among other large institutions) could invest in hedge funds because of the large capital commitment. Some of the largest U.S. hedge funds include Citadel, Bridgewater and Renaissance Technologies.
  

• Asset Managers
  
  Asset managers are financial institutions that create investment vehicles for individuals as well as 401K plans, endowments, and other institutions. Asset managers create mutual funds and ETFs by buying stocks, bonds and other assets and pooling them together based on an investment strategy.
  
  Typically mutual funds charge a larger fee to investors because they are actively managed, meaning that allocations and investments can change based on a change in investment thesis. ETFs charge a lower fee because they usually mimic an index and are considered passively managed. Some of the largest asset managers in the US include BlackRock, Fidelity and Vanguard.
  

• Wealth Manager
  
  Wealth managers invest money for wealthy individuals and families. Outside of investment advice, wealth managers often provide clients with other financial services such as estate planning, retirement, taxes, etc.
  

• Retail Investors
  
  Retail investors are individuals who invest for themselves or their families. Though many retail investors are not trained financial professionals, they can be active market participants who put smaller sums of money to work in individual stocks, bonds and options. In the wake of Covid lockdowns, retail traders have made headlines.
  
  By congregating on Reddit forums and utilizing social media platforms such as Instagram and TikTok, retail investors have begun banning together to move markets in major ways. The meme stock craze and rise of cryptocurrency have all resulted in big moves by retail investors.

Looking for More?

Here is a great article on how to teach your child about the top 3 exchanges in the US and one about the 3 major US indices.

Which do you think is the most powerful market player? Why?