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Small Investors Entering the Stock Market

Most of the advantages that the stock market provides to small investors are usually the detriments of the stock market on its big investors. Small investors have the flexibility to jump in or out of the market and go to cash depending on the stock prices and have the ability to move across different classes of stocks at any time. On the other hand, fund managers and other big investors cannot move freely because they are guided by guidelines which dictate their movements between different classes of stocks and can only move towards the best stocks in any given class (Smith, 2006, p. 1). The other advantage is that when big investors such as mutual funds buy stocks, the stocks go up and vice versa. In the process, small investors have control over their buying or selling positions without affecting the stock prices thus big investors join small investors in buying or selling in anticipation of price collapse (Goodwin, 2009, p. 1). The other prevalent advantage to small investors is that one tries to make money such as capital gains whereas big investors try to beat the stock average indices (Smith, 2006, p. 1).

Small Investors require only relatively small amounts of money to invest in the stock market whereby; in due time, they can pump in more as they gain confidence. They can do this on a periodic basis as they wait for the best positions in the market. This is opposed to big investors who have to continuously put money to work. The other advantage linked to this is the ability of small investors to inject or withdraw money from the market easily thus giving the investors a platform of ease of entry or exit from the stock market as opposed to big investors. On the other hand, they have the flexibility of switching from one stock to another without a lot of conformities and guidelines like big investors thus, can follow the market trends with ease. The other advantage is that small investors can make many or huge purchases or sales without being monitored or noticed in the stock market and are thus able to sell or buy large stock portions without having a direct impact on the prices of those stocks (Goodwin, 2009, p. 1).

However, small investors face a number of barriers in the stock market. One of these challenges is the difficulty in diversification where building a diversified portfolio is normally difficult for small investors because they have limited resources (money) to invest and therefore, they can only purchase a handful of stocks which can be risky in long run and short run (Spitzer, 2009, p. 1). High administrative costs from brokerage firms and mutual funds have a negative impact on the small investors’ returns especially those who have not yet built enough stock portfolios thus exposing the investor to harsh market conditions which often yield low or no returns at all.

High minimum depository amounts, many brokerage firms and mutual funds often have high start up requirements which may amount to even thousands of dollars. This normally limits new potential small investors from entering into the stock market. High fees charged on mutual funds and stocks make it difficult for small investors to easily benefit from the stock market capital gains such as brokerage commissions. Expense ratios (mutual funds) also greatly contribute to the low level of expected and realized returns (Spitzer, 2009, p. 1).

Reference List

Goodwin, P. (2009). Advantages to Being an Individual Investor. Icon Clast-Investor Portal. Web.

Smith, A. (2006). Investing the Right Way. Stock Market Trading Tools. Web.

Spitzer, E. (2009). Is the stock market safe again for the small investor? Not by a long shot. Slate Investor Portal. Web.

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