In the past years, the number of retail investors has risen significantly. Among these retail investors, several are small investors with limited capacities of a few thousand rupees. It is a common belief that you must invest big in the stock market to earn big. But it is partially true. Small investors with a corpus of a few thousand can make more than institutional investors with a deep understanding of investment theories.
Before we discuss the advantages of being a small investor, here are the different types of investors in the stock market.
Who is an investor?
An investor can be an individual or institution that puts money into a business for financial returns. The primary goal is to minimise risk and maximise returns. They contrast with speculators who willingly invest in risky assets hoping for higher profit.
There are different kinds of investors in the market.
Retail or individual investors
A retail investor invests in small quantities on their own. The stocks they buy become a part of their portfolio and don’t represent any organisation.
Retail investors buy stocks directly in the stock market. Sometimes, these investors are guided by greed and fear, which is not the ideal way to invest because of the volatile nature of the stock market.
Institutional investors are large organisations or asset management companies that manage other investors’ funds and invest the corpus into income-generating investments. They make more substantial investments in companies. Unlike small investors, institutional investors buy in bulk. Since they often invest significantly more than their retail counterparts, they exert significant influence on the financial market.
Small investors vs institutional investors
Institutional investors have several advantages, like a research team and direct access to the management to answer their queries before they invest. But these advantages often turn into disadvantages which impact their potential to earn returns.
Access to resources
Institutional investors are large organisations with access to resources like professionals and researchers to oversee their portfolios daily. But it offers them only limited advantages because of performance pressure.
AMCs need to adhere to investment regulations and guidelines while investing. It limits their abilities to take risks. Mutual funds often target to generate average returns to maintain the profitability and reputation of the fund. The fund manager needs to ensure that the fund’s AUM keeps growing, which prevents him from taking risks. Even when he knows that new company stock can increase the returns, he will only stick to the known formula followed by others. A small investor doesn’t feel the pressure.
When you are a small investor, you don’t have the performance pressure of generating continuous returns. You invest your own money according to your risk appetite. A small investor doesn’t have to face the performance pressure like the fund manager of a mutual fund company. As a result, you can invest in stocks with the potential to generate higher returns after researching the market.
A mutual fund manager invests funds of other investors. Hence, he will play safe when it comes to generating returns. As a small investor, you can risk investing in startups that can grow into large organisations. Since you are investing your own money, you can perform your research before investing.
When you know your advantages as a small investor, you can work them to your favour to earn better returns. Open an online free Demat account with Angel One and start investing. You can make significant returns even with a small corpus.