Part 2, White Top Series:
Small Investor Advantages
In the last blog post we began our discussion of the advantages small investors have over huge investment accounts. Part 1, 6 Small Investor Advantages introduced this thinking as acknowledged by legendary investor, Warren Buffett.
This time we continue our discussion covering more small investor advantages including liquidity, investing market pecking order and possibilities of new opportunities unavailable to large accounts.
Those advantages include the edge in liquidity, playing the stock market pecking order and new investment opportunities, all unavailable to large accounts. Investors can play the smaller end of the market for big profits. Be aware, those big profits get earned by taking risks.
Unless you know what you are doing, stay away! The payoff is big for investors with knowledge and experience. You can learn this end of the market. But doing so takes time and much effort. Triflers and gamblers regularly lose playing here, knowledge and experience wins most often.
Investors need liquidity To buy or sell well
Anyone that has sold a house knows it takes some time to find the buyer. Then that buyer must produce the funds. They often face a liquidity challenge. To get the money most people borrow to close on the sale of a house.
In the stock market, as long as we find willing buyers and sellers, most transactions take milliseconds. In the normal trade there is no liquidity issue.
But the sheer size of huge buyers that need huge positions, challenges buyers that need huge positions worth $100’s of millions or billions. They need an equally huge seller which puts them in a considerably smaller pool of investors than what we can readily access at will.
For us buying or selling even a $1 million position in widely owned and large established company can happen in a second. When we move down the size scale things change. The trading volumes and size of positions rapidly decline. Executing well in that situation requires knowledge and experience. The good news is that you can learn to do it well.
Investors can play the market pecking order
Each investment community, market and nation has unique characteristics. Knowing specific markets and their differences, lets investors use knowledge to reap profit!
Day after day experienced investors see clumsy buying and selling blunders that cost investors. It is not just small investor that make these costly mistakes. Large funds with unaccountable managements are the greatest offenders.
Big profits in small prices, companies and
Generally speaking, small companies listed on small exchanges, generally attract lower prices. When they grow to a certain level they can move up to more “senior” exchanges. The larger exchanges have much larger investment communities and far greater access to capital.
This can and does affect the share price. Without the big buyers, smaller players set the prices lower as a normal function of market activity. Small numbers of players and dollars produce lower prices.
Companies moving on up to larger exchanges, increase shareholder value by simply making that move. To be accepted on the larger exchanges, the companies must show growth. That often works well for small shareholders. The value increases can be fast and dramatic!
Knowing this pattern we can go along for a profitable ride. Buy the stock of rapidly growing companies, listed on junior exchanges. Then take the gains in share value as they grow and attract more investors.
Finally, enjoy another nice bump up in price when they move up to senior exchanges. And good for us there is often more to come for growing companies. Once they reach a certain size, larger funds become interested in the growth story. When growing companies become large enough to attract institutional fund managers, their need for large investment positions can yet again significantly bump the share price.
Big players also attract one another. That process all contributes to giving smaller investors that bought in early, some very nice paydays not available to huge fund managers!
New listings offer big risks and rewards
New listing and startup investing are distinctly different from each other. They are also distinctly different from other types of investing. Each are special areas of high risks that can offer high potential rewards.
But often not! As a rule to thumb, if you do not know the type of company, the market and the circumstances well, give IPOs a pass. Most do not produce good returns for most small investors.
This can be a very profitable area to play. But to play well takes more knowledge, skill and experience than other areas of investing. Small caps, companies with small total capitalization of total market value, are a particularly special subset.
Investors see smoke and mirrors, frogs and princes
Institutional and most large investors do not play in the small new listing market. This is one place where small players are king. But play poorly here, and you can soon become a popper. There are many frogs, few princes and endless presentations that involve smoke and mirrors.
Yes, they might find gold in them there hills, but most likely it will not end up in your pocket! Why are such companies offered? This is an area of exceptional profit for dealers and brokers. They make a financial killing on this stuff!
However this soon gets beyond the scope of a beginner. We look at many details in future posts. For now just know that some excellent and very lucrative plays are possible. By very carefully selecting startups this approach can work very well. Risks are high and need managing. When you are just beginning to invest this is definitely not something you should try alone.
Do your homework, bring your common sense and when it sounds too good to be true, you are right! Pass, and you will be safe.
This wraps the small investor advantages posts. Our next post discusses what makes a market in Buyers and sellers agree and disagree to make a market!
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Have a prosperous day!
These discussions and information intend to help you better understand markets and investing. I am not a financial or investment advisor; opinions are for informational and educational purposes only and are not intended as investment advice. For syndication of the site or blog, please contact info@WhiteTopInvestor.com. © 2014 Bryan Kelly