Small investors can deposit money in banks and building societies to earn interest on their savings.
Although it has been the traditional belief that money deposited in a bank or building society is safer than an investment in stock, the recent crises experienced by these High Street institutions have eroded that trust.
Investments in company stock involves risk, but the rewards can be much greater than from a deposit or savings account.
In dealing with small investors, CEOs and CFOs are advised to implement various incentives to keep existing investors and attract new ones.
A company is financed by various sources, such as short-term borrowings, long-term debt, and owner’s equity—ordinary shares, preference shares, and reserves. Small investors can participate in most of these. A significant portion of funds finds its way into the bond or stock markets through financial institutions that are the repositories of household savings. Therefore, the size of resources available for financing a company’s activities depends to a large extent on household savings. Small investors are usually individuals who purchase small amounts of stocks for themselves, in contrast to the large institutional investors such as pension funds. Small investors are sometimes referred to as individual, or retail, investors.
In 2005, the Investment Company Institute reported that 91.1 million household investors in the United States held US$56.9 million of various types of equities.1 This constituted 50.3% of all households. The growing number of small investors gives the market depth.
Banks and Building Societies
Banks and building societies depend primarily on household savings, of which they are the main custodians. The amount of interest they offer on deposits and savings accounts can be an incentive to small investors. For their very survival, therefore, it is vital that such institutions understand how to deal with small investors. They have to design incentives to encourage people to save. One way they do this is by offering savings accounts with a variety of earning structures and conditions. The Halifax’s fixed saving term option2 and Abbey’s Individual Savings Accounts (ISAs) offer the kinds of incentives that may encourage household savings.
Companies can raise money by selling bonds to investors. Although in theory, small investors could buy corporate bonds and hold them, they play little role in the primary market. Simply put, bonds tend to be bought and sold in a closed circle of insiders and experts.
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