Fewer Small Investors: What It Means

In our last post, we made the point that small investors are having a smaller impact on the stock market.

So what does it all mean? 

For one thing, it signals a significant change in the role of the small investor.  In the 1990s, as small investors jumped into the market in force, they increased demand and pushed stock prices up.  Now, as investors flee the market, their exit is becoming self-fulfilling to some degree, as the exit by a large number of investors has held down stock prices.

The market void is being filled to some degree by high-frequency trading (HFT), in which computer-driven trading by large firms attempts to take advantage of momentary pricing inefficiencies.  With HFT, highly leveraged trades take place in nanoseconds. read more

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Small Investors Making Smaller Impact

Small investors get no respect.  When they’re leaving the market, it usually means the market is heading up.  When they’re investing in the market, it usually means the market is heading down.

Some professionals even use the actions of small investors as an indicator of the market’s direction.  To make money in the market, do the opposite of what the small investor does.

As evidence, consider the stampede from the stock market that took place in early 2009.  Many investors stuck it out through major losses in 2008 and finally, unable to take any more financial pain, they exited the market – just before the historic rebound that began in March 2009. read more

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