What is Smart Money?
Smart money is the investment done by big financial companies, Institutional Investors, Banks, hedge funds, etc. to make the price movement in the stock market. Smart money is the fund invested by individuals having an in-depth knowledge of the stock market. As they are big firms, they know when and where to invest to get more successful with your invested money. These big financial companies have extra advantages over the retail investors which results in better trading outcomes.
Smart Money Explanation
Smart Money originally came from the gamblers who used to place their money smartly when they needed to. Those gamblers had a deep understanding of what they were doing with their money. Sometimes they had some insider information that they could use in gambling and others may not be aware of it. The Stock Market could be replicated as the same scenario of gambling. The big investors like banks, market-makers, financial companies, etc. might have some insider information that retail investors do not have. They will capitalize on this situation to get a huge return on investment.
Smart money is the investment done only after the proper understanding of the market along with some insider information. As a result, the success rate of smart money is greater than in retail investing. Also, these investors are like veterans in the field of investing. They have knowledge of multiple mathematical algorithms that they implement while investing. Also, they tend to invest in companies having large market caps in a huge amount at once where they see a profit. This makes the increase in demand and so does the market price. Retail investors can analyze this scenario and capitalize on it.
What is Dumb Money?
Dumb Money is the money managed by retail investors. Institutional investors and retail investors are quite opposite in terms of the volume of capital they have invested. Retail investors do not have access to all the market data in the fastest possible time. Also, they might be unaware of quick-breaking news that might change the market. Most retail investors either panic sell or panic buy based on the rumors. As they do not have internal information like big institutional investors, the success rate of dumb money is relatively low as compared to smart money.
As both smart money and dumb money trade with the same market price, smart money smartly gets an advantage over dumb money as they are traded faster and with more understanding of those stocks. Most dumb money investors are investing due to fear of missing out or noise from other retail investors. This gives an advantage to the smart money investor as they invest best in facts and mathematics.
How to make Dumb Money a Smart Money?
Institutional investors will have a team of analysts and access to unlimited data to process, as a result, they are successful in the market. But a retail investor cannot have such resources that he/she can capitalize on. But there are some important considerations that retail investors can do to make their dumb money into smart money while investing the next time.
- Ask Brokerage:
One of the studies showed that the clients who asked their brokerage what their mistakes wear while investing and how they should have traded differently got a higher success rate. Brokerages generally also have an analyst team that is continually trading. As a result, they have a better understanding of the particular stocks. Always try to get information from your brokerage before investing. Not all brokerage provide you with their information, but if they do then you should capitalize on that.
- Avoid panic buys and sells:
Investors that are completely new to investing are the most victim of panic buys and sells. Try to avoid fake rumors and take advice from someone who is an expert in investing. Instead, you can capitalize this scenario by letting others panic sell or buy and you wait patiently. You need to understand that the stock that goes down will also rise and then we will invest.
- Capitalize Squeezes:
Squeezes such as gamma squeeze and short squeeze come with great opportunities for retail investors to capitalize on the scenario. Gamma squeeze and short squeeze are the conditions in which the stock price of the company starts to rise rapidly. This is due to the involvement of call option trading and short selling respectively.
- Complete your research:
Always complete your research about the stocks and their history before you think of investing in it. Reading the financial documents like 10k and 10q, 8k, S1, S4, etc. will always give the investor an inside knowledge about the company. Such documents will have statements about their liabilities and assets, their profits, etc. From those numbers, you will be able to finalize whether the company is progressive or regressive.
How to identify smart money trading?
The best way to identify smart money trading is by looking at unusual high trading volumes of particular stocks. If you already know about the news or the rumors and see huge amounts of stocks are being traded then it will not be considered smart money trading. Because smart money trading is done when the retail investors are unknown of such news but the institutional investors do.
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