Investors who are professionals have a distinct advantage over those who are not. Professional investors have a wealth of resources, such as technology, data and dedicated teams, market analysts.
It is widely believed that smaller investors have no chance of gaining an advantage over larger market players.
The reality is, individuals today have more market power than ever before and the prospects of their future are improving.
Retail investors, also known as individual investors, are now claiming an increasing portion of the overall trading volume. This percentage will reach a new record of 23% by January 2023. In 2011, it was only 11%.
The Federal Reserve reported that in 2022 21% of U.S. households owned direct stocks, up from 15% in 2019.
Examine some of the factors that can help smaller investors create an even playing field.
Access to Financial Information
Until a few decades back, professional investors and large institutional investors controlled the proprietary research on company performance.
The information that these organizations have is closely guarded and it’s difficult to get the same insight from individuals.
Smaller investors instead had to gather information from newspapers, brokers and annual reports.
The process can be expensive and time-consuming, with outdated information reaching investors.
You can now access financial data on the Internet.
Now, small investors have access to real-time data on the market, including analyst ratings, news about companies, financial statements, and company reports. This allows them to take more informed decisions, as well as react to changes in the market quickly.
Lower-cost trades
Cost of trade has undergone an important transformation.
Investors had to pay an average of 4% commission on all trades before 1975. This included 2% for buying stocks and a further 2% for selling them.
Only the best investments are worth it, given the high costs.
Trading has become more affordable for the average person with the rise of discount brokerages and, more recently, platforms that offer trading without commissions, such as Robinhood.
Investors can buy and sell stock without having to pay hefty trading fees. This is in contrast with professional traders who still have to incur significant costs.
Flexible to adapt their pace
Professional investors are under pressure to produce returns quickly because they manage the money of others.
Investors can operate according to their own schedules, without being held accountable to any external parties.
The luxury is to wait for the perfect opportunity to arise — to make a pitch that will work.
Investment opportunities in small companies
Individual investors have a great opportunity to invest in lesser known and smaller companies.
Professional investors often influence share prices by buying and selling large volumes at once. Buying drives up prices, while sales drive them down.
They are therefore limited to only trading stocks with large market capitalizations that have the capacity to accommodate their volume.
Investors are nimbler and more flexible. They can make trades without having to worry about the market.
They can invest in businesses of any size, allowing them to access investment avenues that large firms cannot.
The small investor is also well placed to look for opportunities to invest into successful regional businesses that they are familiar with.
Uncovering valuable ‘stocks under rocks’
Since the turn of the century, smaller companies outperformed larger-capitalized stocks. Today’s investors have finally begun to benefit from this trend.
The Burkenroad Reports program at Tulane University’s A. Burkenroad reports, a program at Tulane University’s A. Students conduct research into small-cap stock that are often overlooked. We call these stocks “stocks beneath rocks”
They focus their reports on companies which are often overlooked by professionals but have significant growth potential. Burkenroad Reports, which are available to the public, provide investors with unbiased, high-quality analysis. They help uncover hidden gems on the market.
Other free resources available to smaller investors are:
Individual investors have the opportunity to seize new opportunities not available to professionals, and thus increase their influence on the stock exchange.
Peter Ricchiuti, a finance professor at Tulane University’s A.B. Freeman School of Business. His views are his. )
As updates occur, this post on the growing power of individual investors may change.
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