Question:
It is said that institutional traders constitute control of over 70% of the market and commonly manipulate individual stock prices to the disadvantage of individual investors. In addition to investing only in very large cap securities, would investing in an ETF tied closely to the underlying securities basket or market index provide protection against this threat?
McCloud from Scary town
Answer:
I can’t tell you the exact percentage of the markets that institutional traders /investors constitute, but I can to you it is huge. I can also tell you it is not as huge as it once was, now that millions of us retail traders are banging away in the markets each day. Sure, our numbers are small, but that does not mean we are helpless. As you so aptly point out, all we have to do is find ways to ride the coattails of the behemoths who are truly the makers of markets. Your strategy is one approach, and I encourage you to try it. Let me know how it works.
I agree with your idea that this massive control of the markets is a threat, but, as I said, we are not helpless. If we know this to be the case, and it is the case, then we adapt. An article from The Motley Fool (July 2009) supports your notion, but it also supports the idea that you can adapt. Below is an excerpt from the article.
To level the playing field, then, consider doing the following:
1. Don’t attempt to time the market.
2. Don’t trade frequently without a very good reason.
3. Don’t buy into the “insight” of the financial media.
Bottom line: The stocks you buy are not lottery tickets meant to be scratched and then thrown away. They represent fractional ownership of a real, live business. So focus on fundamental analysis gleaned directly from audited financial statements, buy stocks that are selling for less than their intrinsic value, and plan to hold your investment until your thesis has manifested.
I suggest you read this article in full, as it will enlighten you and it will help you realize a path to overcoming any fear you might have about this reality. Copy and paste the link below into your browser.
www.fool.com/investing/small-cap/2009/07/01/the-ultimate-strategy-for-the-individual-investor.aspx
Trade in the day; invest in your life …
