Small and Institutional Investors in Stock Exchange
Small investors refer to individuals and retail traders who buy and sell stock for short periods of time. The institutional investors on the other hand refers to mutual fund holders, corporations and other big companies that buy stocks and hold them for longer periods of time more than the small investors. The institutional investors have more pressure to make high profits in the stock exchange for their clients. They also have a higher risk capacity than the small investors.
The institutional investors have several advantages over the individual investors. First of all they have the information advantage. They have the ability to gather a lot of information that may affect the stock prices of a company more than the small investors. The small investors tend to get company information from watching the news or getting advice from technical analysts. Institutional investors have skilled research teams that analyze listed companies before they take any action. Secondly, the institutional investors have economies of scale advantages. They have the ability to transact in high volume transactions (Kim & Verrecchia, 1991). This assists them to lower the transaction costs considerably. The small investors cannot raise high amounts of money to invest in shares compared to the institutional investors.
The major advantage of the small traders is their ability to sell their stocks in the markets. Institutional investors have the ability to influence the stock prices (Gompers & Metrick, 2001). They therefore find it difficult to sell their large volumes of shares without altering the company stock prices adversely. Their volume of shares hence becomes a limitation. The small traders however are able to sell their shares easily. They can easily correct the mistakes they have made in the market. They could have bought shares and the share prices do not pick as expected so they can offload them easily.
Gompers, P. & Metrick, A. (2001), Institutional Investors and Equity Prices. Quarterly
Journal of Economics, 116, 229-259.
Kim, O. & Verrecchia, R. (1991), Trading Volume and Price Reactions to Public
Announcements. Journal of Accounting Research, 29, 302-321.