Well-funded institutional investing firms - each with big budgets for research, technology and investments - have notoriously been in the driver's seat when it comes to moving the market. A small percentage change in large institutional buying or selling, for example, can immediately affect prices, driving a market higher or leaving it in a free fall. The increase in the number of small investors, coupled with changes in technology, however, could change market dynamics and allow small investors to actually move the market. (These vehicles have gotten a bad rap in the press. Find out whether they deserve it. See Are Derivatives Safe For Retail Investors?)
TUTORIAL: Mutual Funds
Build It and They Will Come
Not that many years ago before the rapid advancements helped by the internet, individual investors were at the mercy of stock brokers to gain important and timely information regarding investment choices, or to place trades in the stock market. Investors had to compete for the broker's time and expertise, often losing out on profits while waiting for advice or to place a buy or sell order.
The advent of the internet, technical charting platforms and discount online brokerage firms have turned the once-tedious, pricey and inefficient task of placing orders into a precise, affordable and efficient method by which individuals can participate in the financial markets. The ease of online investing and a growing interest in self-directed investment decisions have led to a significant rise in the number of small investors.
Big Enough to Move the Market?
With this growing participation from online investors, then, is it reasonable to assume this group has the buying power to move the markets? Not necessarily. In most cases, the institutional players - including investment banks, insurance companies, pension funds, hedge funds and mutual funds - significantly outweigh the small investors in terms of both volume and dollars. They are able to trade in large enough sizes to have an influence on prices. Despite the growing popularity of the individual investor, the institutional investors tend to be the ones with the most power to move the market.
The Silver Bubble
Silver may be an exception. Compared with the volume of other commodities, silver is a relatively small market and as such, even a small amount of buying or selling can affect prices. Silver's recent volatile ride may have been fueled by speculative traders, many of whom were small investors wanting to jump on for what seemed like sure profits. Silver recently made a record high, reaching nearly $50 an ounce for the first time in over three decades. After an impressive run-up during the first four months of the year, including a 27% climb in April alone, silver prices dropped nearly 30% during the second weeks of May.
As both gold and silver rallied to record highs earlier this year, smaller investors were more likely to buy the metal. In fact, silver futures contracts this year are trading on more than twice the daily volume over last year. In response, the CME Group, which runs the biggest silver trading exchange, had to raise margin requirements to make sure traders had enough capital to cover losses brought on by silver's increased volatility. These tighter trading restrictions may be partly to blame for silver's crash because they have driven up the cost of investing in silver. (If you are a hedger or a speculator, gold and silver futures contracts offer a world of profit-making opportunities. Check out Trading Gold And Silver Futures Contracts.)
The Bottom Line
Market participants of all types - whether large hedge funds or individual traders - contribute to market liquidity and collectively give each market its shape. While many of today's popular markets cannot be pushed around by individual investors, silver seems to be an exception today, particularly because it is so heavily traded by the small investors. As technology improves and small traders have access to a growing number of field-leveling advantages, including advanced market analysis tools and direct access trading, the ability for small investors to move the market could eventually increase.