A small investor is one who is not an institutional investor or high net worth investor. The SEC defines an institutional investor as anyone who invests on behalf of a company and a high net worth investor as one who has investments worth over $700000 (Rodeck, n.d). I will discuss the advantages and disadvantages small investors have in stock markets.
Small investors have more asset liquidity than institutional and large investors. This is because a small investor can sell off their investment without influencing the demand and supply of the stock substantially (Smallivy, 2010). A large investor, however, would find it hard to sell their investment because any movement in stocks would lower the price to their disadvantage. Large investors also cannot take advantage of short term investment opportunities due to the time involved in disposing of large quantities of stock (Investorz Blog, 2011).
Complex issues that affect institutional investors such as market capitalization, liquidity levels, and periodic investment performance are not issues of concern to small investors. These investors are thus able to focus on the return aspect of their investment (Kumar, 2012). Small investors do not have to compete with other investors like institutional investors have to (Smallivy, 2010). Large investors are also forced to diversify their investments as a result of market inefficiencies (Gitman & Zutter, 2012). This diversification prevents the optimization of returns in the most productive stocks. Small investors do not face this problem (Rodeck, n.d).
Small investors also face several disadvantages. The cost of the transaction is high per unit of stock because they deal in small quantities and do not have the negotiating advantage that institutional investors have.
These small quantities of stock are also difficult to diversify, which exposes small investors to high investment risk (Gitman & Zutter, 2012). Small investors may also not have access to technical knowledge in markets which may prevent them from making optimal investment decisions (Rodeck, n.d). This lack of knowledge is caused mainly by the inability to hire qualified managers to invest on their behalf (Money Reasons, 2010). This disadvantage can, however, be countered by investing in mutual funds (Kumar, 2012).
Despite these disadvantages, small investors still have an advantage over institutional investors while trading in small quantities. The disadvantages that they have can be countered by joining mutual funds, which effectively makes them institutional investors. This means that a small investor can enjoy the advantages of investing both as a small and a large investor.
Gitman, L. J., & Zutter, C. J. (2012). Managerial Finance, 13th ed. Upper Saddle River, New Jersey: Prentice Hall.
Investorz Blog. (2011). Advantages of the Small Investor . Web.
Kumar, S. (2012). The Advantage To Being A Small Investor. Web.
Money Reasons. (2010). Is the Stock Market A Fool’s Game For Us Small Investors? Web.
Rodeck, D. (n.d). What Disadvantages Do Small Investors Face When Investing in the Stock Market? Web.
Smallivy. (2010). Is a Small Investor at a Disadvantage? Web.