Ideal Time for Individual Investors

Ideal Time for Individual Investors

Submitted by adil on Mon, 06/16/2014 - 17:00

When's the Best Time For Individual Investors?

The highly discussed topic in the market nowadays is High Frequency Trading (HFT). It is the outcome of the controversial bestselling book called Flash Boys: A Wall Street Revolt. This book made the average investors believe that they would never get a fair chance to trade in the stock market because of the dominance of financial institutions and hedge funds. This may lead to an impression that the financial market is rigged. Although, there will always be certain areas of the market that are going to be unfavorable for the investors, yet, this is one of the best times for the investors to invest in the market because of the following reasons:

Lowest Transaction Cost

Transaction cost consists of trading spreads and commission cost. The online brokerages became increasingly popular in the late 90s, which caused the transaction cost to reduce dramatically. Now, a trader can trade hundreds of shares for a very small amount of dollars, usually in units. On the other hand, with the introduction of decimalization for U.S. equities, most liquid stocks have a cost of one cent trading spread, which is nothing as compared to the $0.625 (minimum spread prior to decimalization in 2001). All this has enabled investors to save more and retain huge profits on their investments.

Large Pool of Investment Opportunities

Investors currently have a large number of investment opportunities due to the increasing number of financial products in recent years. Investors have a choice to invest in different categories of financial assets and have easy access to the different markets that were not previously available, such as, foreign markets, derivatives market, commodity market, real estate market, hedge funds and currency market. An investor can reach the potential market through Exchange Traded Funds (ETFs). As of October 2013, worldwide ETF assets are about 300 billion and 70 percent of this amount comprises of U.S. exchange traded funds.

Moreover, with the introduction of more derivatives, such as, weekly or mini options, investors got more tools to speculate the trade and to hedge their portfolio. All in all, investors now have more choices than they ever did and the number is only increasing with the passage of time.

New Era of Information

In the new era of technology, investors have access to a large pool of information. A few years ago, the only source of information an investor used to have was from brokers or other professionals in the market, but now different organizations frequently upload their financial information on the websites, such as, corporate presentations, quarterly reports, financial statements and even the recordings of their communication with the analysts. There are different online portals that give investors access to corporate filings and prospectuses.

Then there is social media, like blogs, that often break the news as soon as it hits the market. All of this has made it possible for investors to receive timely information and hence, take reasonable investment decisions.

Stronger Regulatory Frameworks

The two bear markets in the past 15 years have led to better regulatory frameworks that take serious notice to protect the small investors. Due to increasing accounting irregularities and clean reports published by analysts on dot com companies that were not actually clean, legislative bodies took serious notice of the poor corporate governance. The Sarbanes-Oxley legislation was passed as a result and many other regulations were also introduced to improve corporate governance system and to secure the independence of investment research. These regulations mainly focus on two areas – (a) to prevent the abusive practices in the financial market once they occur, and (b) some regulations have unplanned results, like National Market System Regulation or Regulation NMS, which was passed in 2007 to ensure that some particular orders are placed at the most reasonable and available price. However, there is a group that believes that it caused a surge in HFT.

Despite all this, the fact remains that the rights of investors are well protected. Legislators and regulatory bodies are doing their best to create a balance between individual and institutional investors so as to provide the equal investment opportunities to all the investors.

Availability of More Tools and Applications

There are different applications and tools available for do-it-yourself investors, such as, portfolio management, applications, and technical analysis charting services and trading simulators that are very useful to learn investment tactics and get an experience in making reasonable investment decisions. These tools have changed the dynamics of the market for the small investors who have a chance to become a better investor without risking their money.

If we look in the nutshell, low transaction cost and trading spreads, a large number of investment opportunities, quick access to market information, availability of more applications and tools, and better regulations, have created a better chance for investors to successfully trade in the market despite the latest scandals related to price fixing and HFT.