Financial Management-Risk and Capital-DB3

Financial Management-Risk and Capital-DB3

“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).

The stock exchange is a place where investors of all kinds from institutional to small traders come and trade with each other. Unlike institutional and large investors, there is a general perception among small investors that only big players can make money in stock markets. Call it a myth or a reality, but it is a true and wrong at the same time. It is true because institutional investors made profits more often than small investors. It is false because even small investors have and will always made profit from the very same market. The fact that is often overlooked that small investors cannot match the resources of the institutional investors on the basis of which large investors often end up profiting from their investments. All investors face barriers in the stock market. The fact is that small investors can not ease those barriers with equal ease as that of institutional investors who do so with their resources. The good news is that even small investor can become a successful trader if he/she learns to overcome these barriers which will result in significant cost reduction.

One of the fundamental strategies for success in stock markets is diversification. While, institutional investors have huge resources in their hand which can be easily be diversified, small investors often have limited funds with which they buy one or two stocks and with which diversification could not be achieved. Therefore, they are automatically on riskier side of the trade. This is one drawback of small investor. However, small investors can achieve much needed diversification by employing a broad based index fund which follows S & P 500 Index.

Small investors often enter the markets through brokerage firms and mutual funds. These firms always maintain minimum opening deposit requirements starting from thousands of dollars. This becomes a big hindrance for small investors who have not sufficient resources to start their trading in the market. However, there are still the firms including brokerage houses who can allow having an accounting with few hundred dollars. There are also mutual funds who offers lower minimum for those who ...