Does the stock market trap retail investors?

‘Stock market loves to trap retail investors and traders!’ This idea has been very famous amongst the retail investor community that the stock market is somehow rigged against them. The idea that the whole world is rigged against the common man also gets extended to the stock market where many new investors and traders believe that the market wants to take advantage of the little guy. However, nothing can be further from the truth!

 

Stock market doesn’t care!

The stock market is a system in which every privately listed company’s stocks are allowed to trade freely with limited oversight. If a stock plummets 20% in a day because a bunch of people decided to short the stock, then that is completely fair and legal as per the stock market even though many shareholders lose a lot of money. Similarly, if a stock gains 20% in a day, that’s also completely fair and legal as per the stock market even though the shorters lose a lot of money. The stock market doesn’t really differentiate if the loss makers are big funds or retail investors. In stock trading, one person’s loss is another person’s profit – it doesn’t matter who is on the losing side. Simply put, the stock market doesn’t really care if you make a profit or a loss! The stock market is not going after anybody. In fact, there are a lot of advantages which retail investors have over big funds making it easier to make profits in the market!

 

Advantages which retail investors have over big funds

Retail investors take advantage of their small size and are practically invisible compared to the big funds. Consider a big fund such as LIC, HDFC securities or ICICI securities which are always tracked by the media, retail investors, HNIs, etc. Every single activity which these funds make gets noticed. On the other hand, the retail investor is completely invisible when compared to the big funds. 

It is also much easier for retail investors to get in & out of trades compared to big funds. Big funds generally have to go through a block deal if they want to buy a big chunk of stocks because buying directly from the open market will cause the stock price to skyrocket making it much less profitable for the funds. Do you think block deals cause the stock price to rise? Visit this article to learn the answer!

Retail investors have complete freedom with their money, they can buy or sell whatever they want. The same cannot be said about big funds whose fund managers are restricted by the terms and conditions of the fund policy. Unlike retailers, a mutual fund cannot short stocks, it can only buy and sell stocks! There are many more advantages which retail investors have over big funds. To learn more about these advantages, visit this article! 

 

Why do retail investors lose money?

It might seem counter-intuitive that after having multiple advantages over big funds, the retail investors always seem to lose in the stock market. Even though there are many reasons why retail investors lose money in the stock market (visit this for the full article), here are a few major reasons. 

1. Lack of knowledge

This is the biggest reason why retail investors lose money in the stock market. New investors get trapped in penny stocks which have shaky business models and end up losing their hard-earned money. It also seems obvious for new investors that it is easy for a Rs. 5 stock to double when compared to a Rs. 5,000 stock (even though the opposite happens most of the time). This is where big funds have an advantage over the little guys! Basic understanding of the stock market is an absolute must for any retail investor who is looking to invest his/her money in the stock market. 

 

2. Lack of patience 

Stock market is not a get rich quick scheme. Most new investors get attracted towards the stock market in the hopes of making a lot of money quickly. However, they get completely frustrated when they find out that the stock market is a game of patience! The big funds know that the stock market is a long term game & therefore make decisions which are beneficial in the long run. On the other hand, novice investors get disheartened after a few weeks/months because their dream of becoming a Crorepati overnight didn’t come true!

 

3. Bad money management skills

Money management is key for success in the stock market. Most big funds are extremely diligent with their money because they treat the stock market like a business. Their goal is to make a lot of profit for the company. On the other hand, retail investors treat investment like a game & make decisions without properly managing their money. A simple rule in money management for retail investors is to always invest their own money & keep their usage of margin (debt) under control. It is impossible to lose all your money when you have no debt!  

 

4. Too emotional 

Big funds are aware that the market ping-pongs between greed and fear. This situation of euphoria or despair leads to the volatility in the stock market. Volatility is absolutely amazing if you understand it well. It creates situations where stocks are available at dirt cheap prices & also situations where they become extremely overvalued. The retail investor gets trapped buying stocks in euphoria & sells during despair, which is a great recipe to lose money in the market. If there is a stock which has been hitting the upper circuit for 5 trading days in a row, it makes a lot of sense to not get euphoric and jump into the stock without a second thought!

 

Conclusion

The conclusion is simple – the stock market doesn’t trap retail investors! Retail investors make many mistakes which causes them to lose money in the stock market. It is impossible for anybody to make money in the market without a proper understanding of the stock market. There are multiple advantages which retail investors have over big funds and vice versa making the playing field even for the retail investors. However, if the investor is not comfortable in investing by himself/herself, then it makes a lot of sense to invest using index funds! There are many advantages which Index funds have for new passive investors which can be read in detail here. However, the final decision to invest directly or using an Index fund depends entirely upon the reader! 

 

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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.

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Namit Pandey

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