Investing in the stock market is one of the best ways to build wealth over time, but stock investing can be risky, especially as a small investor. Investors with limited resources face disadvantages when it comes to paying fees. Small investors also have less influence on corporate decisions and are affected by moves in the market after major sell-offs and buys by very large investors.
Stock brokerage firms typically charge transaction fees each time an investor trades stocks, and some charge annual account fees. Small investors tend to be at a disadvantage when it comes to fees because a fee may represent a more significant percentage of a small investor's total investment. For example, if a small investor buys $500 worth of stock and incurs a $10 transaction fee, the fee amounts to 2 percent of his total investment. On the other hand, if a large investor buys $100,000 worth of stock, a $10 fee only amounts to one-hundredth of a percent of his investment. Brokerages may also give large investors and frequent stock traders a discount on fees.
When a small investor buys or sells a few hundred shares of stock, it has no noticeable impact on stock prices. Large institutional investors like hedge funds, banks, stock brokerages and mutual funds buy and sell stock in large blocks, which can give them the power to affect stock prices. Institutional investors can make large trades in an attempt to change stock prices in a way that benefits them or execute trades quickly before normal investors have time to react, giving them an advantage over small investors.
Stock shareholders have the right to vote in corporate elections, such as votes to elect the board members in charge of making high-level decisions and appointing the CEO. The more shares an investor holds, the more influence he has on corporate elections and company management. Since small investors don't hold many shares, they have little or no influence on companies in which they are invested.
Mutual Fund Limits
Small investors can increase diversification by investing in mutual funds instead of investing directly in stocks, but small investors are also at a disadvantage when it comes to mutual fund investing. Mutual funds often require a minimum initial investment to buy shares. Mutual fund minimums vary greatly; some funds have minimums as low as $1,000, while funds intended for companies and other organizations may have minimums as high as $1 million or more. Funds with high minimums may have lower expenses than other funds, giving an advantage to wealthy individuals and institutional investors.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.