The Advantages of Small Investors in the Stock Market
Small investors are those who don't want to sink large sums of money into stocks and other securities. They usually buy shares in smaller dollar volumes to reduce their exposure to the ups and downs of the stock markets or because they prefer to put their money into other investments. Although small investors are not likely to get rich off of their investments, they do hold a few advantages over those who invest large sums of money.
The main advantage for small investors is flexibility for the simple reason that it is easier to maneuver small investment portfolios than large ones. Small investors who trade a few dozen shares can enter and exit market positions more quickly than investors who own hundreds of shares. You can accumulate positions even in thinly traded stocks at favorable prices because you are not placing large orders.
Small investors usually face less external pressure because they do not have to outperform certain market benchmarks. This means you can take a longer-term view and ride out short-term market turbulence as long as the underlying fundamentals of your investments do not change. You can step back during periods of extreme market volatility and wait for opportunities to accumulate positions in quality stocks at bargain prices.
Small investors can choose from different financial assets, such as stocks, bonds, mutual funds and exchange-traded funds without being too heavily exposed in any of them. You can mix and match assets, depending on your financial objectives and how close you are to retirement. For example, if you have just started working, stocks and equity mutual funds might constitute the bulk of your portfolio because they hold the potential for high returns. However, as you get closer to retirement, you might increase the proportion of bonds or bond mutual funds to preserve capital, reduce risk and get regular income. You could also adjust the mix based on market conditions. For example, if technology stocks have rallied recently, you could take some profits and invest the proceeds in bonds or in other industry sectors that have underperformed the markets.
Small investors usually do not have the resources to analyze and monitor dozens of stocks across several industry sectors. However, you can still participate in the stock market indirectly through mutual funds, which offer professional management at a reasonable cost. You could also buy exchange-traded funds, which track major market and industry indexes. Mutual funds and ETFs also allow you to diversify across asset categories, industry sectors and different regions of the world.
Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.