FINANCIAL MANAGEMENT

Financial Management-IP3-Risk and Capital

“During the financial crisis that started in 2008 we constantly heard and read about corruption and scandal on Wall Street. We became familiar with terms such as overleveraged, mortgage backed securities, recession and liquidity crisis...... [Small] investors rightfully wonder whether the stock market is rigged” (Forbes, 2010).

There is general perception in the market that small investors are usually taking the burn for institutional and other large investors in the stock market. However it is not true in reality. Institutional investors do make a lot of money than small investors but they also face the same realities in the market as do small investors. The only difference is that they have developed expertise as well as resources to tackle the realities with lot of ease. Small investors usually enter the market just to make money without first getting acquaintance with the knowhow of the markets. If it is true that big players make profits all the time in the market, then nobody can deny the fact that there have been small investors who have made fortunes out of the same market facing the same realities. Warren Buffet entered the stock exchange at a tender age and starting from the scratch, he has now become tycoon in the same market. It just takes a little knowledge to face the realities and overcome the barriers that come in one's way. Institutional investors have resources, knowledge and expertise of the market that assist them in executing successful trade transactions. The small investors have to face the same conditions in the market. With the little help, he can capitalize the investment and become successful.

Stock market is a place where one has to bear risk to a certain amount. One of the essentials of stock market one learns in a very early stage is Diversification. It is a process in which one person does not put all the eggs in one basket. Through diversification, an investor can spread out its investment in multiple stocks rather than concentrating only one stock. Institutional investors have the funds to diversify their portfolio easily. They invest in range of securities to hedge their risk. On the other hand, small investors could not hedge their risk with equal simplicity. Reason being that they have limited funds and they can only buy stocks of one or two companies. Therefore, lack of diversification pushes them to riskier side and ...