Why So Many Investors Feel the Stock Market Is Rigged

T erms such as ‘liquidity crisis,’ ‘recession,’ ‘mortgage-backed securities,’ and ‘over-leveraged’ became popular topics of discussion during the 2008-2009 financial crisis. New-to-the-market investors were left wondering about stock market rigging, while many veteran investors got burned one too many times by a greedy elite at the expense of the general investing population. Most, if not all, investors were left wondering whether the stock market is rigged.

Key Takeaways:

  • While the internet is an excellent tool for getting information, institutional investors almost always have access to information before the average investor does.
  • Institutional investors can usually negotiate lower commission and fee prices than the everyday investor can.
  • Despite the harsh criticism they may have toward each other, the relationship between elected government officials and institutional investors is significant.
  • Investors should take several hours each week to review business trends and new stock market information available to them.
  • The world is too complex to accurately guess what direction oil, the labor market, and stocks will go in the short-term. However, long-term stocks have consistently improved and beat inflation.
  • Purchasing stock index funds traded on exchanges is a good way to profit from the long-term benefits of the stock market.

Barriers Facing the Average Investor

Image via Flickr by lendingmemo_com

Technically, the stock market is not rigged. However, there are real disadvantages that investors, especially small investors, will need to overcome to be successful in the stock market. Understanding where information is coming from and strategies for successful investing can help investors overcome perceived stock market rigging.

Available Information

Despite what appears to be an endless amount of stock and financial data available online, the average investor isn’t usually skilled in technical analysis. They also don’t typically have access to in-house research analysts, technical experts, or sophisticated automated trading programs providing trading suggestions.

One of the most significant informational barriers the average investor experiences is the actual timing in which they receive information. While the internet acts somewhat as an equalizing factor, the reality is that most institutional investors have this information before the general investor does.

Capital Availability

Probably the largest disadvantage the average investor faces is capital. Consider this non-market example: You are the owner of a small office supply store looking to purchase a large order of paper products for resale. You call your distributor to inquire about pricing. Costco also calls this distributor saying they want the same paper product order for each of their thousands of stores worldwide. Costco will have more pricing power with the distributor than your small office supply store and will probably receive more favorable pricing.

To a lesser extent, the same can be said when purchasing and selling securities. Larger investors can often negotiate lower prices on fees and commissions compared to everyday investors. Also, average investors don’t have the same opportunities to subscribe to IPOs that institutionalized investors do.

Hot IPOs are usually reserved for larger, preferred investors such as pension funds, hedge funds, and individuals having an extremely high net worth. Only after preferred clients have been given the opportunity to subscribe will the IPO be available to the average investor. At that point, investors with small accounts need to consider if investing in an IPO opportunity larger investors already passed on is a good idea.

Political Influence

Despite the harsh criticism many politicians have toward financial institutions during a financial crisis, the relationship between these two groups is significant. Most individual investors don’t have direct access to elected governmental officials or paid lobbyists to watch over their interests. The average investor also isn’t invited for a seat at the table when politicians are considering and writing new laws.

While intimidating, these apparent disadvantages shouldn’t dissuade the average investor from reaching their goals. Careful monitoring of investments, mitigating risks, and staying informed of general investment trends and themes can assist investors in overcoming these imbalances and finding some success in the market.

Mitigation Strategies

W hile the barriers noted above are real, there are ways to work around perceived stock market rigging or, at the very least, increase awareness of the system and how it works. Doing so does require effort on the part of the investor.

The internet has become an information equalizer for average investors. Financial-based websites can assist everyday investors in making sense of the financial market world. Taking an hour or two each week to look over business trends and news, such as reading readily available profiles and research reports on sites such as CBS Market Watch and Yahoo! Finance, can increase the information small investors have available to them. Other tips for mitigating what appear to be rigged markets include:

Long-Term Investing

According to a study, during the 30-year period between 1983 and 2013, a large portion of stock price increases happened on just 10 trading days. Investors who weren’t in the market during these specific 10 days saw a decrease of 2.6% in their returns for this 30-year period. The best way to prevent this decline? Never sell. Staying fully invested in the stock market until long-term financial goals, such as retirement, are met is one way to try to beat the odds of the stock market.

No one truly knows with complete confidence if the price of oil is going to drop over the next four months or if the jobs report for next month will be better than the one before. In all reality, the world is just too complicated to know with absolute certainty which direction stocks, oil, or the labor market will head in the short-term. However, in looking at the stock market over time, the one consistent theme time after time is that stocks generally improve and beat inflation.

Indexing Two Ways

Buying stock index funds, especially those traded on exchanges, is one of the best ways to benefit from long-term rewards of the stock market. These low-fee, passively managed funds are investments looking to match the returns of the stock market. They also provide diversification and additional security for new investors, who are often tempted to disregard the benefits of long-term investing and sell during downward trends in the market.

After investors become comfortable with indexing, they can take advantage of retail stocks by allocating a small percentage of their funds to a retail sector ETF (exchange-traded fund). This type of ETF acts as a retailer stock index, helping investors outpace the stock market as a whole.

For example, the SPDR S&P Retail ETF, seeking to match S&P Retail Select Industry Index returns, as a whole outperformed the SPDR S&P 500 ETF, mimicking the S&P 500 Index for the majority of the 10 years ending in July 2019.

This easy, one-two indexing punch is an ideal plan for most investors. For those believing they have the temperament to hang on to individual retail stocks during a sell-off, then purchasing a couple may be a smart investment. However, the majority of investors find sticking with a long-term investment strategy easier with a diversified portfolio that includes index funds.

Buying on Dips

It’s almost always a bad idea to try to time the stock market. However, as long as an investor isn’t looking to time their way ‘out of the market,’ adding to a position when the market sharply pulls back may be beneficial. For investors who never sell, sticking to index funds and simply purchasing more when the market declines should bring about positive market returns.

Dollar-cost averaging with index funds each month, rain or shine, is a good strategy. This way, when the stock market pulls back 15% in a month, regular contributions will purchase more shares at a decreased cost, decreasing the average cost paid for the investment.

It’s important that investors recognize and appreciate the benefits they receive when buying on declines, but not obsess over what their money is doing until they’re closer to meeting their long-term financial goal or retirement.

The stock market technically isn’t rigged for the everyday investor. Governing bodies like the SEC (Securities and Exchange Commission) exist as a way to level the playing field for average investors. However, it’s hard to overlook the apparent advantages Wall Street money managers continue to have. The best thing an average investor can do is take advantage of any available resources they have at their disposal.