The stock market is one in which shares are traded. This trading may either be through exchanges or sometimes it might be carried out through over-the-counter markets. The stock market is also referred to as the equity market and it serves as one of the most important areas of a country’s economy (Bogle, 2010). A stock market offers an opportunity to companies to gain more investors while being able to access more capital.
The stock market can either be primary or secondary. In a primary market, there is issuance of shares whereas subsequent trading of shares takes place in the secondary market (North & Caes, 2011).
The stock market offers excellent investment opportunities where the money invested earns a good return either in form of capital appreciation or regular income from dividends. Stocks are preferably purchased for investment purposes when their prices are low so that they produce relatively high profits through dividends.
Factors that determine the quality of stock
To determine the quality of various stocks, an investor should consider a number of factors. These factors include management of the company, the products offered by the company, the competitive position of the market, the asset base, the company’s liquidity, the volatility of the stock, and the strength of the company’s corporate governance (North & Caes, 2011).
Depending on the number of shares held by different investors, the issue of ‘big’ investors and ‘small’ investors come up. As the words suggest, ‘big’ investors are those who hold more shares while ‘small’ investors refer to those holding a lesser number of shares. The question that arises is, who between the ‘big’ or ‘small’ investors enjoy the most benefits or endure the most disadvantages?
Disadvantages faced by small investors when investing in the stock market
Small investors are faced with the difficulty of building a diversified portfolio. Whereas big investors may have enough money to purchase as many stocks as they want, small investors lack these funds and they are only able to purchase a few stocks.
This becomes very risky since they concentrate all their money in that investment (Fisher, 2012). In addition, the administrative costs that are charged on these few stocks may at times be too high for the small investors to afford their upkeep.
Some firms may also set a very high minimum opening requirement as the deposit. This makes it very difficult for small investors to navigate their way in the stock markets. Small investors are also faced with the problem of high fees which are charged as a percentage of their total investment (Lensink, Bo, & Sterken, 2001). This in turn reduces the dividends they receive at the end of a financial period.
Advantages enjoyed by small investors when investing in the stock market
Ironically, small investors derive their benefits from their portfolios size. As earlier discussed, small investors are just that, small. In fact, they are advised to remain just as small as they are. Unlike the ‘big’ investor, ‘small’ investors can just purchase the top picks when they are on offer in the sector (DePorre, 2007).
This is mainly because the purchases of the small investor do not largely affect the prices of the shares in the market since they only deal with a few stocks unlike the big investors who would influence the share prices in the market.
In addition, the small investors are able to act with greater speed to every available opportunity in the sector than the big investors since they manage their own undertakings (Cohen, 2012). Furthermore, the risk endured by small investors is very minimal since only a few stocks are involved unlike the big investors who deal in massive stocks.
In conclusion, the misconception that small investors do not stand a chance against the big investors in the stock market should be cleared. On one hand, there are advantages to them remaining just small while on the other hand, there may be some advantages that tag along these small investors.
Bogle, J. C. (2010). The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. New Jersey: John Wiley & Sons.
Cohen, G. (2012, August 12). How Small Investors Gain Such a Big Advantage Over Wall Street. Web.
DePorre, J. R. (2007). Invest Like a Shark: How a Deaf Guy with No Job and Limited Capital Made a Fortune Investing in the Stock Market. New Jersey: FT Press.
Fisher, P. A. (2012). Common Stocks and Uncommon Profits, Paths to Wealth through Common Stocks, Conservative Investors Sleep Well, and Developing an Investment Philosophy. New Jersey: John Wiley & Sons, 2012.
Lensink, R., Bo, H., & Sterken, E. (2001). nvestment, Capital Market Imperfections, and Uncertainty: Theory and Empirical Results. Massachusetts: Edward Elgar Publishing.
North, C., & Caes, C. J. (2011). The Stock Market. New York: The Rosen Publishing Group.