If you’re looking to invest your money, the stock market is one of the most popular places to start. However, it is also very volatile and risky, and some people will even tell you that the stock market is rigged against small investors.
That being said, it’s quite possible to make good returns on your investments in the stock market — as long as you know what some of the problems you might run into are and follow some general stock investing tips. You also have to be aware of the risk of stock market scams, of which there are many.
Is the Stock Market Rigged?
Nearly 50% of Americans Say the Stock Market Is Rigged Against Individual Investors
This can be partly attributed to the widening wealth inequality in the US, which especially affects young people, who have much less faith in the stock market than older generations.
It’s important to note that the people surveyed were mainly independent investors, not investment professionals. Individuals with a college degree were more likely to agree that the stock market is rigged against small investors.
Key stats from survey regarding stock market rigging:
- 48% of American citizens believe the stock market is rigged against individual investors
- 13% of those surveyed disagreed that the stock market is rigged, with 5% strongly disagreeing
- 58% of individuals with a college degree thought the stock market is rigged
The Difficulties That Small Investors May Come Across
Information Asymmetry and Lack of Expertise
One reason why the stock market is probably rigged against small investors is because of the lack of access to professional expertise and information, such as technical analyses of the markets.
Large investment firms and professional asset managers are able to make successful trades because they have access to advanced automated trading systems and because they are skilled in analyzing stock market data.
Professional investors also often have access to inside information. Although it is illegal and unethical, insider trading is commonplace and is a form of stock market corruption.
The internet has made it easier for individual investors to access stock market data and analyses, but there is still a lack of expertise and a lack of access to professional research that makes it harder for individual traders to get ahead.
Little Access To Capital and Pricing Power
Another reason that the stock market can feel rigged against small investors is that they have limited access to capital. This also means that they generally have less negotiating power when it comes to pricing for fees and commissions. The smaller a trade is, the higher a percentage you end up losing on such fees.
On the other hand, large investment companies have access to millions of dollars with which to invest and make huge returns on. Because of how large the sums of money they move are, they can also get big breaks on fees and commissions from trading platforms and brokers.
Lack of Political Influence
Big financial firms have significant political influence, which can be used to manipulate markets and laws in their favor. Little investors typically don’t have any such influence, and thus they are at the mercy of the markets and the laws governing them.
Few Mitigation Strategies
Mitigation strategies are ways to cut losses and avoid losing everything because of stock market volatility. Professional asset managers and investment companies have many mitigation strategies, and can afford to lose on some trades because they win on so many others.
Individual investors don’t have access to the same amount of mitigation strategies as professional investors do, so it’s much easier to lose everything because of a bad investment decision.
Tips for Successful Investing
Think Long Term
Unless you’re trying to make investing in the stock market a source of regular income, you should be investing for the long term. This means spreading your funds out over multiple different assets and holding on to them for years until you need to access the money for retirement or another purpose.
As long as your portfolio is diverse enough, this strategy should in theory produce decent annual returns of 10% or more.
Invest Passively
Investing passively is part of long-term investing and means that you are minimizing how much you’re buying and selling. Instead of buying stocks, watching them constantly, and selling them as soon as they hit a certain high price, you buy a few different stocks and just sit on them for a long time until you’re ready to sell.
One of the best assets you can passively invest in is an index fund or an ETF. These are basically like pre-diversified portfolios that contain different percentages of well-performing stocks. They do not provide instant high returns, but the way that they are built ensures that their value gradually increases over time.
Have an Emergency Fund Available
You should never invest so much money that you don’t have enough in savings for emergencies. When investing, you always run the risk of losing, and you never want to put yourself in the position of not having enough money when you’re in a tight spot.
Experts recommend that you set aside 3-6 months worth of living expenses as an emergency fund, preferably in a high-yield savings account that will earn you some interest on the money. Then, should you lose your job or need to pay for something unexpected, like unforeseen medical bills, you can use this money for it.
Check Your Broker To Avoid Stock Trading Scams
One of the most common ways to get scammed on stock trading is by trading through a fraudulent stock broker. Shady stock brokers run various types of scams, including manipulating stock prices or taking under-the-table payments from companies to push individuals to buy or sell their stocks.