What Disadvantages Do Small Investors Face When Investing in the Stock Market?
It's easier to be a small investor than ever before. With an Internet connection and a computer -- or even a smartphone -- you can research markets and stocks and manage your portfolio more efficiently than any 20th century investor. Small investors still face disadvantages, however, playing in the same sandbox as multimillion-dollar investment funds.
You can't hope to match the buying power of a major hedge fund or mutual fund when you go it alone. The stock market responds to investors with lots of money, for example, by giving them lower fees or commissions on trades. Even if you and a hedge fund buy the exact same stock at the same price, your higher commissions may eat into your profits. If a promising company decides to issue stock, big investors get first crack at the initial public offering.
Becoming an expert in anything takes work, and stocks are no exception. If you're a normal human being with a job and a life, it's not easy squeezing in research about promising companies or market trends. Big investors can afford to pay for research; they may even have the staff to do it full-time, in-house. The big guns can also afford the best, most cutting-edge technology to analyze and automate some of their buying decisions.
Big-shot fund managers often get to talk to CEOs and CFOs one-on-one or attend small group briefing sessions. Even if the executives don't divulge more than the law allows, the inside track gives big investors an edge. Money and connections also give big investors an advantage in lobbying Congress. When elected officials debate rules and regulations for the stock market, the small investors aren't usually the people they're listening to.
There are lots of ways in which unethical players can take advantage of small investors. When insider trading happens, it's big investors who hear the secrets and know to sell or buy their shares quickly. Analysts at an investment bank may recommend worthless stocks to benefit the bank's brokers, who collect fees when you buy the shares. Even with the power of Internet research, it's hard to compete with people who aren't playing by the same rules as you.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.