The Advantages of the Small Investor
Original post by Geri Terzo of Demand Media
There are some advantages reserved for the small investor, even though this individual has less money to invest than large institutions. The trading activity of all small investors combined can direct large sums of money into or out of the markets. Also, the small investor has access to live stock market information, which could help an individual to make informed decisions and earn potential profits.
Small investors have the ability to impact the financial markets. Many small investors choose to invest in mutual funds, which are professionally-managed investment funds that grant investors exposure to a number of stocks or bonds. According to an August 2010 article in "The New York Times," investors pulled more than $33 billion from domestic stock mutual funds through just beyond the first half of 2010. Doug Cliggott, an analyst with Credit Suisse who was cited in the article, suggested that small investors were shunning risk.
According to a July 2010 article on the Charles Schwab website entitled "Can the Little Guy Beat the Pros?," small investors have the potential to outperform expert money managers. One reason is that individual investors have access to the same or similar resources used by the professionals due to the proliferation of financial tools, such as charting, graphs and historical price comparisons. These resources may be made available to investors by stock brokerage firms and other service providers. Some brokers even make independent research available to small investors, which is what many professionals use to make trading decisions.
Small investors can typically respond to opportunities in the stock market more quickly than large trading firms are able to do for pure logistics. Institutional investors trade extremely large blocks of shares due to the size of investment portfolios and requirements. Subsequently, large trades cannot occur too quickly without having a notable influence on a stock, according to the Charles Schwab article. By trading fewer shares, small investors can execute orders more quickly and without going through some of the compliance channels that are required for large institutions.
A small investor can take on as much risk as he is comfortable with. According to the Charles Schwab article, institutional investors are exposed to different risks, such as needing to perform inline with some benchmark investment. The article suggests that institutional investors might actually bypass potential opportunities to pursue a proven path for investing and protect performance statistics. Individual investors might benefit from investing in sectors where large investors do not frequently tread, such as small stocks.
- Brokerage Review: Wells Fargo Brokerage / WellsTrade Review 2011
- Early To Rise; How Small Investors Gain Such A Big Advantage Over Wall Street; Guy Cohen; May 2009
- "The New York Times"; In Striking Shift, Small Investors Flee Stock Market; Graham Bowley; August 2010
- Charles Schwab; Can The Little Guys Beat The Pros?; Greg Forsythe; July 2010
About the Author
Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.