If you own stock, you've got lots of company. Approximately 91 million people, or 56.9 million households, in the US own stock directly or indirectly, through stock mutual funds. Almost half own shares on their own, and 90% own stock mutual funds. A majority of the investors—73%—hold stock in a tax-deferred or tax-free plan, such as an individual retirement account (IRA) or a 401(k).

Most individual investors aren't active traders. Just 21% buy and sell stock more than 12 times a year. And most equity portfolios are quite small, with an average of four different stocks.

INSTITUTIONAL INVESTORS
An institutional investor is a person or organization that invests its own assets or those it holds in trust for others. Typical institutional investors are investment companies (including mutual funds), pension systems, insurance companies, universities, and banks.

Institutional Investors For example, CalPERS, California's public pension fund, is an institutional investor, as is the Cornell University endowment fund. Institutional investors trade regularly and in enormous volume, in part because they have a lot of money to invest.

A buy or sell order must be at least 10,000 shares of stock or $100,000 in bonds to be considered an institutional trade — a small number for a big mutual fund eager to put its investors' money to work.

Program Trading PROGRAM TRADING
Program trading means buying or selling a basket, or group, of 15 or more stocks worth at least $1 million at the same time. Some program trades are triggered automatically when prices hit predetermined levels. Others are initiated to profit from price spreads.

Large-scale program trading can cause abrupt price changes in a stock or group of stocks or even dramatic shifts in an entire market. To control potentially negative consequences, exchanges including the New York Stock Exchange (NYSE) imposes trading restrictions, called circuit breakers, to slow down or halt trading when markets fall too far too fast.


SIZE MAKES A DIFFERENCE
A company's size — or market capitalization — is one factor to consider when you decide which stocks to buy. Capitalization is calculated by multiplying a company's outstanding shares by its current stock price. For example, a company with 100 million outstanding shares at a current market value of $25 per share has a capitalization, or cap, of $2.5 billion. The chart below summarizes the differences between large-cap, mid-cap, and small-cap stocks.

Capitalization Where to Get Information Volume of Trading Pace of Trading Risks and Rewards
LARGE–CAPS
 (Companies with capitalizations of more than $5 billion, though that number varies) 		Dow Jones Industrial Average

S&P 500 Index

Extensive media and brokerage attention

Companies provide information 		Large Rapid Often high and sometimes volatile prices, though limited risk of company failure

May pay regular dividends

Sometimes limited growth potential
MID–CAPS
(Companies with capitalizations between $2.3 and $5 billion, though that range varies) 		Mid-cap indexes

Some media and brokerage attention

Companies provide information 		Large Rapid Potential for growth greater than for larger companies, but so greater risk of loss
SMALL–CAPS
(Companies with capitalizations of less than $2.3 billion) 		Russell 2000 index

Limited media coverage

Companies provide information 		Potentially small Potentially slow Big gains possible

Higher risk of loss from company failure or poor management


INVESTMENT CLUBS
If you want to participate in the stock market but hesitate to get started on your own, you may want to join an investment club or organize your own. While investment clubs have many advantages — among them building confidence, sharing the burden of investment research, and being able to build a diversified portfolio — joining a club doesn't necessarily guarantee strong returns or protect you from losses. One common problem is that investment decisions are typically made by consensus. That could mean agreeing to buy and sell against your better judgment.

Investment Clubs Many clubs use guidelines provided by the National Association of Investment Clubs (NAIC). If you are interested, you can contact them at 877-275-6242 or visit their website (www.better-investing.org).

BUYING STYLES
If you take a long-term view, your investing style may fit into the buy and hold category. That means you keep stock you've purchase in your portfolio through market ups and downs, often over a period of years. You may even buy more shares in market dips.
You may prefer to divide your portfolio into one section for buy and hold investments and another for investments you intend to sell. The key is to stick to your strategy for each group — or have a persuasive reason for changing your mind.

If you buy stocks planning to sell them when they have increased a certain percentage in value — say 15% or 20% — or if they have lost a certain percentage — say 5% or 10% — your style may be described as trading. It may take some effort to stick to your plan since you may feel you're missing out on the potential for greater profits or that the investment is sure to rebound in a market recovery. But the idea is to lock in gains and prevent major losses.

Day traders, in contrast, attempt to profit by buying and selling rapidly to take advantage of small price changes. This approach, also known as market timing, has serious drawbacks for individual investors despite access, via the Internet, to volumes of information and nearly real-time quotations. Repeated transactions result in higher trading costs, and the probability of executing the right decision at exactly the right time is extremely small.

 

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