Understanding Market Participants

Many different people and firms trade the same share on the same day. Each of them has a different size, a different goal and a different holding time. Because of this, one trade does not mean the same thing for everyone. A purchase made by a housewife saving for the future and a purchase made by a large fund can look identical on a screen.

Picture a mandi where a housewife, a restaurant owner and a wholesaler all want tomatoes. The crate is the same, but the quantity, the deadline and the reason differ for each of them. Here the picture stops working in one place. At a mandi you can see who is bidding, but on an exchange you cannot see who sits behind an order.

Sabzi Wala Foods Ltd is an imaginary company used only to explain. The numbers, rates and limits in this lesson are teaching numbers, not real ones. Let us say that on an average day 20,000 of its shares trade. This one number will let us compare the size of different participants against a normal day, so keep it in mind through the whole lesson.

Asha buys 10 shares, a day trader buys 100 shares, and a mutual fund buys 50,000 shares. At ₹200 a share, these orders are worth ₹2,000, ₹20,000 and ₹1,00,00,000, which is ₹1 crore. Asha holds for years, the day trader for hours, and the fund for years. All three buy the same share, yet their needs and their effect on the market are very different.

To see the size of each order, divide it by the day's 20,000 shares. Asha's 10 shares are 10 ÷ 20,000, or 0.05%. The day trader's 100 shares are 0.5%. The fund's 50,000 shares are 250%, which means the fund's order is two and a half times a whole day's trading. Size, time and rules differ greatly.

This is why a chart cannot tell you who moved the price. Order data does not show names, so you cannot say whether a foreign fund or retail investors were behind a trade. The rest of this lesson meets each participant in turn, and shows what each one can and cannot do.

Participants differ in the money they control, how long they hold and what they are allowed to do. Some of them own shares, some trade them, and some only serve or supervise the market. It helps to separate these three roles at the start, because beginners often mix them together.

Think of a cricket ground, with players, umpires, ground staff, a ticket counter and spectators. Each has a clear place. In a market the picture is looser. A spectator can also play, and a player can become a watcher tomorrow. The same person may be an investor in one share and a trader in another.

There are eleven kinds of participant in all. On the buying and holding side are retail investors and traders, mutual funds, insurers and pension funds, foreign portfolio investors, wealthy individuals and portfolio managers, promoters, market makers, and proprietary firms with algorithms. On the serving side are brokers, then the exchanges together with clearing corporations and depositories, and finally SEBI, the regulator. The groups differ in how long they usually hold, from seconds for a market maker to many years for founders.

Now see who holds Sabzi Wala's 10,00,000 shares, priced at ₹200 each. Together they are worth 10,00,000 × ₹200, which is ₹20,00,00,000, or ₹20 crore. The founders hold 8,00,000 shares, which is 80%, worth ₹16 crore. Foreign investors hold 1,00,000 together, which is 10%, worth ₹2 crore. Their holding is spread across several funds.

The mutual fund holds 50,000 shares, which is 5%, worth ₹1 crore. Individuals also hold 50,000 shares, which is 5%, worth ₹1 crore. Together these four holders account for every share. As a check, 8,00,000 + 1,00,000 + 50,000 + 50,000 is 10,00,000 shares, and 16 + 2 + 1 + 1 is ₹20 crore.

Asha's 10 shares are worth ₹2,000, which is 10 ÷ 10,00,000, or 0.001% of the company. Notice that holding and trading are different things. The founders hold 80% yet may trade nothing for years, so the biggest holder and the most active trader are two different lists, and you should not mix them up when you read a news headline.

A retail investor is an individual who uses their own money. The same person can be a long-term investor in one year and a short-term trader in the next. There is no licence or special status needed for this, and no fixed amount that makes a person retail, apart from the IPO limit that we will see later.

Think of a person with a small vegetable cart. The owner buys from anyone, stocks anything and can close the cart at will. A big wholesaler has rules, staff and clients to answer to. A retail investor is like the cart owner, with no fund rulebook, and may even hold cash for as long as needed.

The picture stops working in one way. A cart owner trades face to face and knows who is across the counter. A retail investor shares one screen with large investors and cannot see who is behind an order. Only public information is open to everyone equally, and that is the same for the large and the small.

Take Asha, who buys 10 shares of Sabzi Wala at ₹200 and holds them for years. That is 10 × ₹200, or ₹2,000, and 10 ÷ 20,000, or 0.05% of a day's trading. A day trader buys 100 shares for ₹20,000 and sells within hours. That is 100 ÷ 20,000, or 0.5% of a day's trading.

Ravi sells his 10 shares to pay a bill, which is also 0.05% of a day's trading. Such small orders fit easily inside a normal day. By comparison, a fund's buy of 50,000 shares is 50,000 ÷ 20,000, or 2.5 times a whole day. In an IPO, retail means a bid of up to ₹2,00,000.

A common claim says retail investors always buy late and sell low. No source here supports it for any one investor. Many people do find it hard to stay calm when prices move, and the psychology lesson covers that. Trading small and free of a mandate helps with flexibility, but it does not decide results.

A foreign portfolio investor, or FPI, is a foreign fund registered with SEBI to invest in India. News and data sites still call it an FII. SEBI registers FPIs in two categories. Category I includes government-related investors, central banks and pension funds. Category II covers most others, such as corporate bodies. Both categories invest under SEBI's rules, and both must be registered before investing in Indian shares.

FPIs follow SEBI rules and foreign-exchange rules. One FPI, or one investor group, holds below 10% of a company. Sabzi Wala's 10% foreign holding is therefore spread over three FPIs, holding 4%, 4% and 2%. That is 40,000, 40,000 and 20,000 shares, which add up to 1,00,000 shares. These limits are written rules, so they apply in the same way to every foreign fund.

Think of a foreign buyer of a flat in Pune who pays in dollars. Say the flat's price rises 10% in rupees. If the dollar also buys 10% more rupees, the buyer's value in dollars stays the same. The rupee gain is real, but the buyer measures the result in dollars, so the exchange rate matters.

Take FPI-1, which buys 40,000 shares at ₹200 when ₹80 equals $1. This costs 40,000 × ₹200, or ₹80,00,000, and ₹80,00,000 ÷ 80 is $100,000. These exchange rates are teaching numbers, not real rates. Per share, ₹200 ÷ 80 is $2.50. This dollar figure is what the foreign investor will compare with later.

Later the price rises 10% to ₹220, and the rupee weakens so that ₹88 equals $1. The sale gives 40,000 × ₹220, or ₹88,00,000, and ₹88,00,000 ÷ 88 is again $100,000. Per share, ₹220 ÷ 88 is $2.50. The rupee gain is ₹8,00,000, or 10%, but the dollar gain is $0. The same sale is a gain in rupees and none in dollars.

Two common claims need care. One says that FPI selling always crashes the market. Every share sold is bought by someone, and on one example day FPIs net sold 3,000 shares while others net bought 3,000. Another says that FPIs know more. A foreign fund may trade for its own written rules or for reasons abroad.

A mutual fund pools money from many investors and gives each of them a number of units. A unit is one small, equal part of the pool. The fund then invests the pool in shares, bonds or both, and each investor owns a part of the whole pool in proportion to their units.

Think of a village chit group buying a tractor together, each member owning a share. Chit members all know one another. Fund investors do not, and a fund has a professional manager and a regulator. A mutual fund is set up as a trust. A SEBI-approved asset management company runs it, and a SEBI-registered custodian holds its securities.

A custodian is an institution that keeps securities safe on someone's behalf. The fund follows written rules, called its mandate, which say what it may buy and how much. Rules also limit how much goes into one company. Here the teaching cap is 10% of the pool, so no single company can take more than a tenth.

A stake of 50,000 shares in Sabzi Wala is ₹1 crore, which is exactly 10% of a ₹10 crore pool. The fund can build that stake, but it could not add another ₹1 crore to the same company. Such rules explain why a fund cannot simply keep buying one share without limit.

Insurers and pension funds are the other large Indian investors. Exchange data groups all domestic institutions together as DII. Foreign portfolio investors and domestic institutions differ in their rules and in their currency. A foreign investor measures returns in dollars and follows a foreign mandate, while a domestic institution measures returns in rupees. The horizon varies by investor and by fund, and no claim about skill is made here.

The steps below follow Asha's money through a fund. The arithmetic is teaching arithmetic, not a forecast. It ignores charges, though real funds charge a yearly fee and NAV is after it, and it assumes no cash is kept, though many funds keep some. AMFI, the mutual fund industry body, publishes fund NAVs.

A high net worth individual, or HNI, is a wealthy person who invests larger sums. Some rules and products depend on the size of the sum, so the amount invested can change which rules apply. This is not a separate kind of market. The same exchange serves them, but certain doors open only above a particular amount.

Think of a wholesale counter at a mandi that opens only for orders above a set size. The customer with a small order must use the ordinary counter. The picture differs in one way. Here the thresholds are set by regulation, not by the seller's choice, so they are the same for everyone who qualifies.

An IPO is a company's first sale of shares to the public. For an individual, a bid of up to ₹2,00,000 falls in the retail bucket. A bid above ₹2,00,000 and up to ₹10,00,000 falls in the small non-institutional bucket, and a bid above ₹10,00,000 in the big one. Non-institutional means investors who are neither retail nor large institutions.

Take bids of ₹1,90,000 and ₹2,10,000. They are only ₹20,000 apart, since 2,10,000 − 1,90,000 is 20,000. Yet the first is retail and the second is not. A bid of exactly ₹2,00,000 is still retail, because the limit is 'up to'. A bid of ₹12,00,000 is in the big bucket. Funds and insurers use a separate institutional bucket.

A portfolio management service, or PMS, has a professional manager run shares in an account in your own name. The minimum is ₹50,00,000, which is 50,00,000 ÷ 2,00,000, or 25 times the retail IPO limit. Buckets have different allotment rules, which the IPO lesson explains. Real bids are in whole lots; this example ignores lot size.

A common claim is that HNIs make the market move. No daily HNI figure is quoted here, so how much any HNI trades, and when, is not shown. For an individual, the size of the bid sets the IPO bucket. That is the one thing this lesson can say with certainty about wealthy investors.

Promoters are the founders and controlling group who own and run a company. Their holding, their pledges and their trades are public information. A promoter is both a shareholder and the person running the business, so the market watches what promoters do with their own shares with special care. Their stake is therefore described openly, and anyone can read it.

Think of a kirana shop owner who also takes a loan against the shop. The owner decides everything in the shop. In a listed company the picture is different, because outside shareholders own part of the company. Also, a lender can sell the pledged shares, but not the shop itself. Promoters report holdings and pledges every quarter.

Rules require a listed company to keep at least 25% of its shares in public hands. Sabzi Wala's public holds 2,00,000 shares, or 20%, so the company must raise it. Founders sell 50,000 shares: 8,00,000 − 50,000 is 7,50,000, which is 75%, and the public then holds 25%. That is the target met.

The 50,000 shares are 50,000 ÷ 20,000, or 2.5 days of normal trading. So a promoter may sell in order to meet a rule. A sale alone does not show the reason, and a promoter's buying does not always mean good news. Insider trading rules also bar anyone from trading on news that is not yet public and could move the price.

A pledge means giving shares to a lender as security for a loan. If the loan is not repaid, the lender may sell them. Suppose the founders pledge 2,00,000 shares, which is 25% of their holding. At ₹200 these are worth ₹4 crore, and a loan at 50% of value is ₹2 crore. If all of them were sold, that would be 2,00,000 ÷ 20,000, or 10 days of trading.

Now the price falls 40% to ₹120. The pledged shares are worth 2,00,000 × ₹120, which is ₹2,40,00,000. The loan of ₹2 crore is now ₹2 crore ÷ ₹2.4 crore, or 83% of their value, instead of 50%. These are teaching ratios, and real loan terms differ. A promoter's loan can therefore rise and fall with the share price. A company's quarterly shareholding pattern shows promoter holding and pledged shares.

A market maker is a firm that keeps both a buy price and a sell price waiting in the order book. It earns the small gap between the two prices, and it carries the risk that the price moves before it can complete both sides. This is the reason you can usually buy or sell a popular share quickly.

Think of a currency booth at a railway station. It buys dollars at one rate and sells them at a slightly higher one, and earns the difference. The picture stops working in one way. A booth holds notes whose value moves slowly, while a market maker holds shares whose price can change quickly.

Suppose a market maker offers to buy 100 shares at ₹199.95 and to sell 100 shares at ₹200.00. The gap, ₹0.05, is called the spread. One round trip means a buy and then a sell. It earns 100 × (₹200.00 − ₹199.95), which is ₹5.00. Costs are ignored in this example.

Now look at the risk side of the same trade. After buying 100 shares at ₹199.95, the best buy price drops to ₹199.00 before the sale can happen. Selling at ₹199.00 loses 100 × (₹199.95 − ₹199.00), which is ₹95. That one loss is the same as the profit of 19 round trips, since ₹95 ÷ ₹5 is 19.

So the spread pays for the risk. It is not a sure gain. Two common claims are that market makers decide the price and that they earn a guaranteed profit. Apps do not show who is quoting at a given moment, so neither claim can be checked from a screen. A market maker follows the market and does not command it.

An algorithm is a computer program that follows fixed rules to send orders. A proprietary firm is a firm that trades its own money, not clients' money. High-frequency trading means very fast algorithmic trading. These three ideas often appear together in news, which is why they are explained together here, in one place, in plain words.

Think of a bank standing instruction that pays a bill on a fixed date by a fixed rule. The instruction does the same thing every time. An algorithm can also watch prices and adjust what it does, which a standing instruction cannot. In both cases, a person writes the rule first and the machine follows it, without tiredness or hesitation.

Say a fund wants to buy 50,000 shares, and the 10% cap allows it. The fund also decides to buy at most 10% of a day's trading, which is a teaching number. That is 10% × 20,000, or 2,000 shares a day. To buy 50,000 shares at that pace, it needs 50,000 ÷ 2,000, or 25 days.

In one day, an algorithm can send these 2,000 shares as 20 parcels of 100 shares each, since 20 × 100 is 2,000. A parcel of 100 shares is 100 ÷ 20,000, or 0.5% of a day's trading. That is the same size as the day trader's order. This way of sending a big order in small parcels is called slicing.

So one large buyer can look like many small ones. How much of the market's trading is done by algorithms is not stated in this lesson. A common claim says every sudden price jump is caused by machines. A price move does not show why it happened, or who sent the orders, so the claim cannot be tested from a chart.

Brokers, exchanges, clearing corporations, depositories, registrars and SEBI each do one job. None of them promises a profit or a rising price. A beginner often hears all of them described together as 'the market', but they are separate bodies with separate duties. Knowing which one to ask is half of solving a problem.

Think of a school, where SEBI is the principal who sets the rules. A depository is the school office that keeps the records, an exchange is the exam hall where the work takes place, and a broker is the bus that takes you there. A student can change schools, but the regulator is not optional.

Brokers and many other intermediaries are registered with SEBI. SEBI's own website lists the registered intermediaries that you can check. Exchanges are recognised by SEBI rather than registered. Each body has its own duty, and a good habit is to confirm on SEBI's website that a firm is registered before you deal with it.

If an order is rejected, ask the broker. If shares are not credited after settlement, which is the final exchange of shares and money, ask the broker first and then the depository. A complaint about fraud goes to SEBI, and the investor protection lesson explains the route in detail, step by step.

SEBI's rules reduce some risks, but they cannot remove losses. SEBI does not approve every share, does not tell you whether a company is good, and does not tell you whether a price will rise. It sets and enforces rules. Each body does one job, and none of them promises a gain.

Shares are recorded at a depository in the holder's name. A broker gives access to the record, but the broker is not the owner. The depository record is the one that says who owns the shares, and this is true for a small investor as much as for a large fund.

Think of a land record office, which shows whose name a plot is in. An agent can help you reach the record but does not own the plot. A broker can change or close, but the record is held elsewhere. The agent is like the broker, and the record office is like the depository.

Custody means keeping securities safe on someone's behalf. A mutual fund's securities are held by a SEBI-registered custodian, an institution that does this job, and the founders hold theirs in their own demat accounts. Asha's 10 shares sit in her own demat account, in her own name, reached through her broker.

A demat account is your account at a depository, and your broker is its access point. If a broker closes, the holdings are not removed just because of that, and the account can be moved to another broker. Check how your own account is set up. Where shares sit does not tell you whether a company is good.

Depositories send you alerts when shares are debited. SEBI requires shares to be credited straight to your demat account. A signed delivery slip, which is the form that tells the depository to move shares, or a login lets another person move shares, so keep both safe. A common claim is that your broker holds your shares, but the record is at the depository.

Flows are what a group bought minus what it sold in a period. This difference is called the net. Exchanges publish the day's FPI and domestic institution figures for shares each trading day. They arrive after the trading day and show what happened, not why. Large single trades are also disclosed, with size limits that the exchange sets.

Think of a school sheet that shows, class by class, how many more students came than left. The classes are fixed, but exchange counting rules decide who sits in which group, and the first figures for a day are provisional. Like the sheet, flow figures describe the past and are not a promise about tomorrow.

On our average day, 20,000 shares trade, and foreign investors buy 5,000 and sell 8,000. Their net is 5,000 − 8,000, which is −3,000. That is 15% of the day's trading. Domestic institutions buy 4,000 and sell 2,000, so their net is +2,000. Individuals and all others buy 11,000 and sell 10,000, so their net is +1,000.

Every share sold is bought by someone, so the nets of all groups add up to zero. Here −3,000 + 2,000 + 1,000 is 0. In value, at ₹200, the nets are −₹6,00,000, +₹4,00,000 and +₹2,00,000, which also add to ₹0. Total buying and total selling are each 20,000 shares.

A net hides what sits behind it. Foreign investors net sold 3,000 shares, yet they also bought 5,000. The table does not say whether the price rose or fell. A common mistake is to think a net of −3,000 means the price must have fallen. The rest of the market balances it, and flow figures show what happened, not why, and not what comes next.

Before reading anything into a big investor's move, ask five questions. How big is the order? How long will it take? What rules does the investor follow? Is the investor forced or free? And what can you actually see? These questions turn a headline about a big investor into something that you can measure and think about calmly.

Think of a weather report, which tells you what the sky did. It cannot say whether it will rain on your trip. In the same way, a big investor's trade tells you something about that investor, who has a different size, a different time and a different rulebook. It is not a plan for you.

The five questions use only the numbers met earlier in this lesson, so you can check each one by simple arithmetic. They also guard against a common thought: 'if the big players are buying, I should too'. This lesson cannot answer whether that suits your goals, your time or your risk.

Markets carry risk, including the risk of permanent loss of capital. This lesson is education, not investment advice, and nothing in it is a recommendation to buy or sell any security. For advice specific to your situation, consult a SEBI-registered professional. A big investor's move tells you about that investor, not about your next step.