The Advantages of the Small Investor

Small investors have freedoms and advantages the large funds do not.

Small investors have freedoms and advantages the large funds do not.

You have managed to save up some money and are considering making some investments. In the very large world of investing, being a small investor can actually have advantages. The large players in the markets, such as hedge funds and mutual funds, have to play by specific rules, where as you don't have to. This means that you have many options open to you, and can move in and out of the market taking advantage of opportunities only when you want to. There are always risks in investing, but hopefully by utilizing your advantages you can minimize the downside and profit from the upside.

Nimble

If you are a small investor you will likely be buying positions of several hundred shares or fewer. This this may be a lot of money personally, but in the investment world it is considered a small position. Having a small position can be an advantage compared to players who must buy and sell tens of thousands of shares. With a small position you are able to buy and sell when you want to, even in adverse conditions. For example, you buy 400 shares of a company you like. After a year of drifting slightly lower the stock begins to fall aggressively. Even with the stock declining you will likely be able to easily sell your 400 shares before the stock falls even lower. Being nimble means you can quickly exit, and enter, the market in a timely fashion if you need to. A large fund on the other hand may have hundreds of thousands of shares, taking days or even weeks to sell.

Small Markets

The majority of the daily volume in the markets is centered around large companies that trade on major exchanges such as the Dow Jones Industrial Average and Standard & Poor's 500. This means small companies' stocks, foreign markets or private investments may be undervalued and can present opportunities for the small investor. Mutual and hedge funds have strict guidelines and that means they often cannot invest in something until it reaches a certain size or produces a certain track record. As a small investor you can buy stocks that are flying under the radar but exhibiting strong potential. There is risk though. Until a smaller company catches the eye of the bigger players it is unlikely to move significantly higher, no matter how good the prospects look.

Inefficencies

Events oftent create short-term inefficiencies in the market. Most often these inefficiencies are corrected by big institutions or hedge funds, yielding them a profit. Occasionally though inefficiencies are created by institutions, which allow the small investor to capitalize. For example, when a stock is removed from a popular index institutional traders will sell it, even if selling is unwarranted based on the outlook of the stock. As a small investor you can benefit from the reduced share price if you believe the stock is a good buy. Another opportunity occurs when a company splits or is spun off. Large institutions may sell or avoid the smaller company, giving small investors a chance to pick it up at a reduced price. Of course, not all such situations turn out to be profitable investments.

Timing

As a small investor you don't need to be constantly invested in the market. You don't need to hold a falling stock. Instead, you can sell the stock and wait for the stock to begin moving in the right direction before purchasing it. If the market is flat you can also hold off on purchasing a stock until it begins to show signs of strength.

About the Author

Cory Mitchell has been a writer since 2007. His articles have been published by "Stock and Commodities" magazine and Forbes Digital. He is a Chartered Market Technician and a member of the Market Technicians Association and the Canadian Society of Technical Analysts. Mitchell holds a Bachelor of Management in finance from the University of Lethbridge.

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