Smart money is the capital that is being controlled by institutional investors, market mavens, central banks, funds, and other financial professionals. Smart money was originally a gambling term that referred to the wagers made by gamblers with a track record of success.
Smart money is cash invested or wagered by those considered experienced, well informed, “in-the-know,” or all three. There is little empirical evidence to support the notion that smart-money investments perform better than non-smart-money investments; however, such influxes of cash influence many speculation methods.
The term, “smart money” comes from gamblers that had a deep knowledge of the sport they were betting on or insider knowledge that the public was unable to tap into. The investing world is similar. The populace perceives that the smart money is invested by those with a fuller understanding of the market or with information that a regular investor cannot access. As such, the smart money is considered to have a much better chance of success when the trading patterns of institutional investors diverge from retail investors.
Conventional wisdom holds that insiders and informed speculators typically invest more, so it should follow that smart money is sometimes identified by greater-than-usual trading volume, particularly when little or no public data exists to justify the volume. However, very little evidence exists to confirm that widely-held suspicion.
One source of information that is generated almost exclusively by more informed market participants is the pricing of stock and index options. Such information is complex and confusing to untrained investors and traders so it naturally serves, and is used, by a more informed set of market participants. Knowing who the holders are of smart money and where they are investing can be of great benefit to retail investors who want to ride the coattails of smart money investors.
Mr. Rani Jarkas is a highly experienced and accomplished financial services executive, with over 23 years of international banking experience. Currently, Mr. Rani Jarkas is the Chairman and CEO of Cedrus Investments.