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. We also are reminded of the more recent scandals when we hear names such as Bernie Madoff. Madoff scammed billions from innocent investors by using fictitious financial transactions. There was without a doubt a strong dislike toward Wall Street during those days from

Main Street

. Many would-be first time investors in the stock market do not believe it is a fair playing field. Likewise, many market veterans have been burned once too many by the greedy few at the expense of the general population.

So investors rightfully wonder whether the stock market is rigged. Technically, the answer is of course, no, the stock market is not rigged but there are some real disadvantages that you will need to overcome to be a successful small investors. Let's examine some of them here which in turn may help you navigate thru future market turmoil.

Despite the seemingly endless financial and stock data found online, as an individual investor you do not have access to in-house technical experts or research analysts. Most investors also do not have sophisticated automated trading programs to provide trading suggestions. Nor are most average investors skilled in technical analysis. Perhaps an overlooked nuance in this informational imbalance is the actual timing or dissemination of information that is crucial. Yes, the internet is somewhat of an equalizing factor, but the reality is that many institutional clients know the outcome of information before the investing public does. Brokerage firms typically have a research department as well as a team of traders. (For more on gathering information, take a look at The Flow Of Company Information.)

Perhaps the biggest disadvantage small investors face is capital. If you aren't at all familiar with the inner workings of the stock market, imagine you own a small convenience store and you want to buy a large order of cigarette lighters for resale. You call up your distributor and ask for a price. On the other hand, Wal-Mart calls this same distributor and says they want the same exact cigarette lighters for their thousands of stores worldwide. At the end of the day, Wal-Mart has more pricing power than the mom-and-pop convenient store and will get a better price.

Perhaps to a lesser extent, the same is true when buying or selling stock. At the transaction level, similar to Wal-Mart, a larger client will be able to negotiate lower prices on commissions and fees compared to the average investor. In addition, the average investor does not get the same opportunity to subscribe for an IPO that an institution does. The hot IPOs are generally reserved for the preferred clients: hedge funds and pension funds, and extremely high net worth individuals. Only when all the preferred clients have been offered to subscribe to the IPO would the average investor get a chance to invest. But at the point, you would have to question an investment in an IPO that all the major clients have rejected.

Political Influence
How many individual investors have direct access to elected government officials or have paid lobbyists to look after their interests? Despite the apparent vitriol for financial institutions by the government during the financial crisis, these financial companies still exercise tremendous influence over our political process. Of course, drug, tobacco and technology companies also exert political prowess in Washington. Many former government officials end up landing big corporate jobs and vice versa. Most of us do not have a seat at the table when new laws are being considered or written. We rely on our elected officials to do this for us who are the very same people that are influenced by big investors.

Mitigation Strategies
Don't fret, there are ways to work the system or at least raise your awareness of it, but it requires effort. Information, although not always timely enough to matter, is at your disposal. The internet has become an equalizer for the small investor. Financial-based websites can help small investors make heads or tails out of the financial markets. Set aside an hour a week to review business news and trends and read the readily available research reports and profiles on sites such as Yahoo! Finance and CBS Market watch. Furthermore, it is important to keep a watchful eye over your investments and set a stop loss regardless of how much you like the company you own. Many people get wiped out of the stock market because they do not set stop losses on their investments. Of course, many investors use diversified index funds an investment strategy and are considered to be more "passive" investors. Regardless of your style, monitoring your investments is good risk management.

Some things are not going to be overcome no matter how much homework you do or discipline you display. Huge investment capital and political influence are examples. But one can review publications and align or at least be aware of where institutional money is going. Many publications such as Investor's Business Daily designate institutional sponsorship as a critical investing indicator. Chances are in your favor if you are buying a stock that has a rising institutional presence. It is also important to realize that markets go up and down and experience what economists refer to as exogenous shocks. These are events that no one, including the privileged few, could have predicted.

The stock market is technically not rigged for the average investor. Laws and governing bodies such as the Securities and Exchange Commission (SEC) exist to "level the playing field" for everyday investors. However, there are undeniable advantages money managers on Wall Street have over us: timely access to privileged information, huge amounts of capital, political influence and greater experience. Although intimidating, these apparent disadvantages should not dissuade you from reaching your investment goals. By carefully monitoring your investments and taking risk mitigation steps such as stop losses, as well as keeping informed of general investment themes or trends, you can overcome these imbalances and still be successful in your investing endeavors.

For related reading, take a look at Private Equity Opens Up For The Little Investor and Why Being a Copycat Investor Can Get You Hurt.

Related Articles
  1. Investing Basics

    The Biggest IPO Flops

    Even with the uncertainties of IPOs, companies will keep issuing them in efforts to grow their enterprises, and some will end in disaster.
  2. Stock Analysis

    Is the Stock Market Crashing? 5 Signs to Consider

    Learn about some signs of a potential stock market crash including a high level of margin debt, lots of IPOs, M&A activity and technical factors.
  3. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  4. Investing Basics

    3 Key Signs Of A Market Top

    When stocks rise or fall, the financial fate of investors change, as well. There are certain signs that can reveal a stock’s course, and investors don’t need to be experts to spot them.
  5. Investing

    Asset Manager Ethics: Rules Governing Capital Markets

    The integrity of the capital markets needs to be kept at utmost importance for all investors. This article shows how to maintain the integrity while investing.
  6. Fundamental Analysis

    Top Reasons IPO Valuations Miss The Mark

    The costly services of investment banks don’t necessarily guarantee accuracy in IPO pricing.
  7. Investing Basics

    Taking the guesswork out of IPO analysis

    Burned by IPOs before? Fear not. Learn how to distinguish overhyped new public companies from ones with a little more promise.
  8. Investing News

    Understand the SEC Rules on Equity Crowdfunding

    The SEC's adoption of equity crowdfunding rules, initiated under the JOBS Act, enables small investors to invest in companies that show early potential.
  9. Investing Basics

    Tax-Efficient Strategies For International Clients

    In a globalized world, international clients seek to diversify holdings by accessing U.S. markets. Creative strategies will help optimize tax positioning.
  10. Investing Basics

    What Happens in a Haircut?

    One meaning of haircut is the difference between prices at which a market maker can buy and sell a security.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What kind of assets can be traded on a secondary market?

    Virtually all types of financial assets and investing instruments are traded on secondary markets, including stocks, bonds, ... Read Full Answer >>
  4. Why would a company decide to utilize H-shares over A-shares in its IPO?

    A company would decide to utilize H shares over A shares in its initial public offering (IPO) if that company believes it ... Read Full Answer >>
  5. How do I place a buy limit order if I want to buy a stock during an initial public ...

    During an initial public offering, or IPO, a trader may place a buy limit order by choosing "Buy" and "Limit" in the order ... Read Full Answer >>
  6. How do corporate actions affect floating stock?

    Corporate actions, defined as a company's actions that affect the amount of outstanding company stock shares, can either ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  2. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  3. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  4. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  5. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  6. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!