Small investor's advantages in today's markets
Small investors, also known as retail investors, are frequently cited as being frustrated by the markets and feel as though they are being taken advantage of by the system. In fact the system is designed to take your money from you and anyone else it can. If you are smart though and learn the system you can take money from the markets and do so more easily than the large players involved.
The stock, bond, and commodity markets are centralized environments in which buyers and sellers of shares and contracts can come together in an effort to profit. You will profit if you are correct in your assumptions about future price movements and if you protect your profits by selling and collecting your gains. If you are not right about price movement and do not protect profits you will lose money. The markets do not owe you a profit no matter how much you think they should. To assume and think otherwise is unwise.
As a small investor you have the advantage of putting relatively small amounts of money into your pool of funds, IRA, SEP, 401K etc., on a periodic basis and wait for the market to do something that makes sense to you. A professional investor, trader, or money manager has to constantly put the money to work they have entrusted to them.
A small investor can put their money to work in a mutual fund or an ETF and get in and out of the market easily with modest transaction costs. A professional investor/money manager can do the same thing but they are doing it on a larger scale making getting in and out more difficult. The more money going in or going out the greater the impact on the price of a stock or other investment instrument. Institutional investors that are building positions in a company do not want other players to know what they are doing until they are finished building their positions. Increased competition could push the price higher than they are willing to pay thus forcing them to discontinue purchasing stock until the price corrects some.
You may have heard the saying the trend is your friend. In an effort to profit money follows where the money is flowing, whether it is going into or out of an instrument. When "Big Money" follows "Big Money" the footprint of that activity can be seen in higher or lower prices depending on the trend and whether money is coming or leaving.
A small investor is nimble by comparison and can make many purchases or sells, usually, without significantly impacting the price one way or the other. Several hundred or several thousand shares are not normally enough to impact price. "Big MO" might buy 5, 000 to 50, 000 shares at a time and do so periodically over the period of a year or more. These inflows and outflows of large amounts of money are observed by other professionals and they hope to use it to their advantage. The trouble is for them to seriously profit by it they may tip their hand the same way the other "Big Money" players do. Luckily, the small investor barely goes noticed and can build and sell large positions over time with little impact on price.
Large investors or money managers frequently purchase shares of stock during lull periods of activity and when prices are falling. This way they are able to purchase large quantities of what they want when others are throwing it away and not bid the price up against themselves. The downside is they may have to wait a while for prices to turn around. A small investor who may not want to risk further downside can purchase stock when prices are rising and the trend perhaps more developed and profit comfortably with less risk than the large players.
Like the large money managers or professional investors the small investor/speculator has to do their homework and decide what basis they form their investment opinions on. My personal favorite is the use of Technical Analysis to help determine whether the "Big Money" is buying or selling the stock or underlying instrument I have an interest in.
Some investors like value investing, using the Ben Graham approach to investing, which Warren Buffett also utilizes in his strategies. Value investing when used with timing strategies of Technical Analysis can provide a significant advantage to the small investor as he builds positions in companies that are growing their business over time.
Whatever method you use to determine what stock or investment to purchase it is always prudent to learn entry and exit timing techniques. I personally enjoy finding stocks that are consolidating and seem to be getting ready to breakout of tight holding patterns on their way to higher or lower prices. Additionally, timing your trade to coincide with increased trading volumes can put the odds of success in your favor.
W.R. Winder has been using technical analysis to examine the activity of financial markets for 30 + years. Using a combination of price and volume analysis he attempts to determine what the state of current investor sentiment is and how best to profit from those observations.
Article Source: ArticlesBase.com
