The stock market is perceived to be a scary place. However, it is even scarier for individuals and small investors, who are at a disadvantage against institutional or larger portfolio investors who have access to not only cutting-edge technology and information, but also to advance investment strategies.
Take a look at these four crucial issues that individual/small investors face in today's stock market and need to overcome if they intend to play a long innings in the game of probability:
Risk of being individual/small investor
One of the biggest challenges facing individual investors in today's markets is the risk of being a small fish in an ocean. These investors have limited choices – they can buy stocks, invest in mutual funds and maybe trade futures and options. All these instruments are generally too complicated and high-risk when compared with investing in bonds and other debt securities – largely a forte of wealthy investors.
Additionally, individual investors trade for themselves with their own money, and even a few small losses can force them out of the market. This is in contrast to institutional investors who invest or trade on behalf of their wealthy clients, position their trades deciding the overall trend of the market, and are able to ride it out even if they record losses for some time.
Lack of cutting-edge information
Noted British author Francis Bacon wrote in one of his books that "knowledge is power". He couldn't have been more right if one considers it in the perspective of the stock market. Individual/small investors are always pitted against professional investors, who have at their disposal best of research and analysis – both fundamental and technical.
Despite the advent of the internet, wherein, one can argue, you can stay on par with a professional investor, the fact remains that institutional investors are always way ahead of the crowd as they have access to in-depth data and information about companies in which they invest.
Scarcity of resources, hence strategies
One of the finest strategies to stay afloat in the stock market is to manage risk efficiently. Diversification is a major part of risk-management as it protects from a drastic erosion of one's investment in case of a market crash or during extremely volatile market conditions. However, given fund constraints, individual investors find it difficult to diversify their portfolio across different companies and industries, thus making individual investors prone to losses arising out of even slight market volatility. And that, in turn, takes a toll on their already small capital deployed in the market and drives them out of the market.
During the same market turmoil, wealthy investors either average out or pump in additional funds to expand their portfolio – thus marking a huge return for them when markets make a turnaround.
Doing it alone
Even though working alone and managing things on your own is often cost-effective, in the stock market, it is the herd mentality that works. As it's human, an individual is most likely to think unilaterally when coping with stressful markets conditions. In this situation, one is most susceptible to mistakes – whether making decisions on investing, or trading. On the other hand, large portfolio investors have a team of professionals who make a collective decision by looking at various aspects of not only the security, but also of the market and other factors.
The strategy to work as a team makes institutional investors successful in the long run. On the other hand, working alone proves as a big disadvantage for individual investors who end up losing and ultimately heading out of the game.
