Traders are very important for the financial market. Do you know why?

Why are traders important for the financial market? | Vrid
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Previously, we discussed some stats about traders and whether trading is suitable for you. While doing the research, we found two extreme sides to trading. Either people fully believe in trading and think they can earn a profit from it, or they totally hate trading and don’t want anyone to trade.

But through history, we found extremes are not good. Balance is crucial everywhere. So does that mean trading and traders are important? Let’s find out.

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Buckle up, here we go!

Most people think trading and investing are the same. But they are two different activities. Traders and investors take part in the same financial market but perform different tasks using different strategies.

For starters, trading is buying and selling stocks, bonds, currencies, and commodities with a price and time frame in mind. It is the opposite of investing, where we use a buy-and-hold strategy.

Major traders include investment banks, market makers, arbitrage funds, and proprietary traders and firms.

Traders use different methods, like technical analysis, to decide whether to buy or sell. They analyse the charts built from the historical data of a stock price. By analysing the trend, volume, etc. they try to predict the price trend of a stock. Many retail traders sometimes decide only based on a rumour or stock tips. 

And yes, trading is a full-time profession. To be a successful trader, you need a lot of skills like patience, risk-taking ability, quick thinking, analytics, etc. You need to learn technical analysis, fundamental analysis, businesses, etc. 

If anyone says you can earn money without these skills, they are lying.

Are traders important?

Yes, they play a necessary role for the market to function smoothly. Let’s try to understand some of these. 

Important role played by traders

1. Liquidity

Traders are pivotal for maintaining liquidity in the financial markets. Traders beat investors in terms of the volume of trades and the speed at which they’re executed.

Think about it. If you want to invest in a listed company, what do you do? You place a buy request on your broker app. Your order gets executed only when the exchange can find a seller who wants to sell his shares. What if there are no sellers?

Your order won’t get executed. The same goes for when you want to sell your shares. If there are no buyers, you won’t be able to sell your shares and get stuck. That’s why experts suggest not investing in low-volume stocks and financial instruments.

2. Information

Traders need to be the most active in the market to profit from small inefficiencies. And while doing this, traders distribute all kinds of market and company news. 

You would have seen this in the web series Scam 1992. Traders do proper research and know in and out about some companies. 

This becomes a critical input point for the other traders and investors in the market. Without them, you would receive information too late. 

3. Market crash

Most people fear stock market crashes because it results in massive losses. Usually, speculators and short sellers are blamed for market crashes. But these short sellers can actually prevent the market from crashing sharply. Not going to get into the details. But traders can create and reduce the impact of a market crash. 

And we all should know that market crashes are essential. Without them, the prices of assets will constantly increase, straying away from their intrinsic value. 

With all the above roles played, traders are necessary. Because of them, our markets are much more robust and efficient today compared to earlier years. So without traders, it would be hard to invest, and the market wouldn’t function smoothly. 

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Still Curious?

If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.

Investopedia – The Roles of Traders and Investors

Motilal Oswal – The important role that traders play in the market

Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.

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DISCLAIMER: This newsletter is strictly educational and is not an investment advice or a proposal to buy or sell any assets. Please be careful and do your own research.

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