Stock Markets and Small Investors

Generally it is seen that whenever there is a big correction in the Capital Markets, especially in India, it is the small investor who is hit the hardest. The question here arises is why do small investors lose the most in these crashes?

This can be attributed to the psychology of most of the small investors. In India generally a small investor is a person who either has no or very little knowledge of stock markets or who has some knowledge of stock markets by reading newspapers or magazines but can't take decisions when it comes to investing. Also many of these guys do save money from their monthly income and invest them periodically in the stock market. Now as they are working professionals they do not get much time to do research on different companies or sectors so the easiest way is to listen to stockbroker with whom s/he might have an account. Also, listen to colleagues and friends who also trade in the stock markets. These guys have another option to read financial newspapers and magazines.

Now it is but obvious that these stock brokers or newspapers have their vested interest in the companies that they are recommending, either directly or indirectly. There is possibility that these guys might have purchased earlier at a much lower price and now they want the general public to invest money in these companies' shares so that later even they can sell them at higher prices.

Also Indian markets are mostly driven by the Foreign Institutions (FIIs). Initially these FIIs create a climate wherein they keep on investing money in the markets and when markets are gradually rising they start recommending companies and sectors that according to them will outperform the market. By this time even the domestic financial institutions and stockbrokers start investing money and then comes the turn of small investors who act on the recommendations they get from financial advisors or from reading articles.

Now obviously as they are late entrants they have entered at a price higher than the purchase price of Institutions. As the prices are gradually coming up small investors feel very happy and are reluctant to book profits as the amount invested by them is less and thus the profits are less and they want to earn a handsome amount. Even at present they are getting news of market's bullishness for a long time to come.

Almost all the newspapers and the financial advisors are predicting a long bull run ahead for the stock market. Thus on hearing and reading this news the small investors hope for more profits and thus are unwilling to book profits as they are quite sure that the markets will keep on rising because some big, famous and experienced investors and advisors are saying so. And one fine day the stock markets start crashing as the FIIs have started to book profits and the markets crash in such a way that the small investors who were hoping to book profits in the later period are not even getting chance to book profits at a respectable price.

At present the scenario is that the biggies have already booked profits and the small investors are just cursing themselves and waiting for the markets to rise again and give them a chance to exit, but unfortunately now the same newspaper and the same financial advisors who were most recently praising the economic scenario and the market conditions and were quite bullish are now singing on a totally different tune and have suddenly turned bearish. Their views have changed suddenly from being bullish about the markets to turning bearish and foreseeing a downturn in the economy and the stock market in the near future.

Thus, in this way the small investor loses his/her hard-earned money by booking losses as the markets are not bouncing back as the FIIs have lost interest in our markets or maybe they want the markets to come down in such a way that they get to invest once again at very low levels. Thus, the small investor has to book losses as s/he can't bear more losses or has to stay invested for a very long time and in this way they can't even invest in the markets when the markets crash as all their savings are now either lost or stuck in markets.

Thus, the small investors should in fact learn more about the markets and equip themselves with a greater knowledge so that they can take informed decisions and can also have at least some idea about when to enter in the market and exit from it.