Professional investors have long held significant advantages over individual investors. They have vast resources at their disposal, including technology, data, and dedicated teams of market analysts.
The prevailing wisdom is that the playing field is so skewed against smaller investors that they have virtually no shot at gaining an edge over the larger players shaping the market.
However, the reality is that individuals have much more power in the market today than they ever have before, and their prospects are only improving.
Individual investors (also known as retail investors) are claiming a growing portion of overall trading volume, reaching a record high of 23% in January 2023, up from just 11% in 2011.
There has also been a notable increase in investment among U.S. families: the Federal Reserve reports that 21% of families held direct stock ownership in 2022, compared to 15% in 2019.
Let’s examine some factors enabling smaller investors to create a more level playing field.
Better access to financial information
A few decades ago, large professional investors were the gatekeepers of proprietary research and in-depth analysis of company performance.
These organizations kept their insights closely guarded, making it difficult for individuals to access the same level of information.
Instead, smaller investors had to piece together details from sources such as newspapers, consultations with brokers, and corporate annual reports.
This process could be time-consuming and expensive, and the information was often outdated when it reached investors.
Today, the internet has enabled individuals to access detailed financial information on demand.
Small investors can now review real-time market data, analyst ratings, company news, and financial reports, equipping them to make more informed decisions and react quickly to market changes.
Lower-cost trades
The cost of trading has also undergone a significant transformation.
Before the deregulation of commissions in 1975, investors had to pay a standard 4% total commission on trades — 2% when buying a stock and another 2% when selling.
This high cost meant that only the most promising investments were worth the risk.
The rise of discount brokers, and more recently, commission-free trading platforms like Robinhood, has made trading far more accessible to the masses.
Individual investors can now buy and sell stocks without paying hefty fees, unlike professional investors, who are still often saddled with considerable trading costs.
Flexibility to move at their own pace
Because professional investors typically manage other people’s money, they face pressure from their clients to deliver returns in a timely fashion.
Individual investors, meanwhile, are free to operate on their timelines without having to answer to external stakeholders.
They have the luxury of waiting for the right opportunities to emerge — a good pitch to swing at, so to speak.
Opportunities to invest in smaller companies
The ability to invest in smaller and lesser-known companies is a key opportunity for individual investors.
Because professional investors buy and sell substantial volumes of stock at once, their trades often impact share prices: buying drives prices up, while selling drives them down.
As a result, they are typically limited to trading large-cap stocks that can accommodate the volume they need to move.
Individual investors, on the other hand, are far more nimble and can trade without worrying about moving the market.
This flexibility allows them to invest in companies of all sizes, giving them access to avenues for investment that big firms typically can’t tap into.
Small investors are also in a great position to seek out opportunities to invest in successful regional companies that they interact with in their daily lives.
Uncovering valuable ‘stocks under rocks’
Smaller companies have outperformed large-cap stocks for the better part of the last century, and today’s investors are finally starting to reap the benefits of this trend.
At Tulane University’s A. B. Freeman School of Business, the Burkenroad Reports program explores the kinds of stocks that hold unique value for individual investors. Through this program, students conduct in-depth research on under-the-radar small-cap stocks — which we like to call “stocks under rocks.”
Their reports focus on companies that may be overlooked by professional investors but offer significant potential for growth. Burkenroad Reports are publicly available, providing investors with high-quality, unbiased analysis that helps uncover hidden gems in the market.
For those interested in exploring further, some other free resources for smaller investors include:
By leveraging these resources, individual investors can seize opportunities that aren’t available to the pros, solidifying their growing influence in the stock market.
(Peter Ricchiuti is a Finance Professor at Tulane University’s A.B. Freeman School of Business. Views are his own.)
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