While governments have no problem with population flaunting money at gambling or lotto, they bare retail investors from stock markets quoting high risks and lack of knowledge. The access to top return opportunities is too expensive for retail investors, which leads to a growing imbalance between the rich and the poor.
1. Managing the Risks
Your safety from investment risks is the argument commonly used by governments and financial institutions to prevent you and the majority of the population from ‘playing’ the stock market even though the stocks have higher odds and potential returns than gambling.
The higher risk, the higher returns, and in case of venture capital, the returns can be 10-100x the input which averages to around 20% ROI a year assuming only 1 in 10 of their funded investments succeeds. However, unlike gambling, investing lets you own shares of companies, which is an added benefit.
2. Educating the Investors
Another reason why investments are deemed too risky for individual investors is that stock picking can be a complicated process, and a poorly balanced portfolio may lead investors to losses.
However, it is also an industry’s open secret that fund managers put their own money into a passive index fund, which is a portfolio of small amounts of all the S&P 500 companies. The passive strategy might initially offer less potential returns in volatile markets. However, it comes with tax advantages and fewer costs overall, and effectively outperforms the actively managed portfolios.
A question then arises, does a retail investor lack the debt of knowledge necessary to join this market, or are we bared from high ROI opportunities because of a few decades of lobbying.
3. Lowering the Costs
To join the market, you often need to go through a broker who will require a brokerage fee and a minimum investment. Many old school brokers demand at least 10k initial investment with substantial transactional costs and taxes, which creates a high entry barrier.
There are also mutual funds designed to pool retail investors to buy a shared portfolio, but they also usually require rather substantial investments of 3k or more.
One way to solve this issue throughout the industry would be to digitize assets and company equities and divide them into smaller, affordable units using the blockchain technology. Many companies are already issuing their shares in the form of tokens, or represent company equity and asset ownership in the form of smart contracts. That allows users to purchase stocks and invest with tiny amounts of money.
Currently, the stock market is too expensive for a retail investor, particularly through brokerage intermediaries, so the highest potential returns opportunities remain reserved for the high net worth individuals (HNWI), VCs, and corporations. The large stake players claim superior knowledge and risk management abilities, but their portfolio management skills have recently been put into question. Perhaps it is time to turn to technologies and legal solutions that allow retail investors equal opportunities in shares ownership.