Is the Stock Market Stacked Against the Small Investor?

It's often said that only big investors can make money in the stock market, and that things are stacked against the little guy, the small investor.

While I don't think the first part of that is true, the second part is. More is possible for you if you are a big investor. Hedge funds and some mutual funds are only open to people who have a large sum to invest, such as a million dollars.

A stark example, which has stuck in my mind for many years: When Apple Computer was first going public--having its IPO (initial public offering of stock), in the jargon—I called my stockbroker and said I wanted to invest in it. He explained to me that he was allotted only a certain amount of stock that he could sell, and, he said, "It's going to my big customers—and I mean big, million-dollar accounts." The example really needs no comment.

Many fees, such as brokerage fees or account maintenance fees, are flat fees so that they are proportionately less (per share, for example, in the case of brokerage fees) for larger transactions or larger accounts.

Not to mention that, once you get into the really, really big money, really big investors can own a large enough proportion of a company's stock that they can influence the running of the company by getting themselves or their own candidates on the board of directors. Then, presumably, they look after their own interests, whatever they may perceive those interests to be.

And when it comes to taxes on their income, again the wealthy have an advantage. A lot of tax-advantaged investments, such as municipal bonds, are most beneficial for wealthy investors. And the very wealthy can get better tax advice and guidance by hiring very savvy tax attorneys, and thus they can largely or entirely avoid paying income tax.

Someone once said that it's easy to make a lot of money and hard to make a little money. I heard that a long time ago and I keep realizing, more and more, how true that is. But usually you need money to make money.

Copyright © 2011 by Richard Stein