Dfa Small and Value Effects

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DFA’s primary focus was on small-stock and value-stock asset classes because several researches showed that small stocks and value stocks constantly did better than big stocks and growth stocks. Also, small stocks were illiquid, and their price could be affected substantially by purchasing and selling the stocks. FDA wanted to take advantages of the small effect, the value effect, and the illiquidity of small stocks, so they were willing to accepted large block of small or value stocks only if they could get it at a discount. DFA received thousands of offers every day, and its skilled traders carefully picked about 20 of those based on several criteria. DFA liked to corporate with close broker-dealers, who had shown themselves to be trustworthy and disclosed everything they knew about the stock. Before the trade, FDA also wanted to know how big a discount they could obtain, whether it was the entire block of stock, and the effect in the diversification of the fund after purchasing the block of stock. DFA did not sell based on news or rumors about the company. Furthermore, FDA sold shares when a stock no longer fit the portfolio it was in – if a small stock became big. By the time DFA was selling, the price was usually above the purchase price and it was often no longer difficult to sell. FDA carefully picked valuable stocks and did not trade as often as trading big stocks. Buy big blocks of small or value stocks at a discount allowed them to get the stocks cheap and reduce transaction costs. Thus, investors did not pay a high management cost and were offered accounting firms that acted as intermediaries known as registered investment advisors (RAIs). DFA’s low fee enabled them to charge a moderate advising fee to the client while still keeping total charges reasonable. Others can’t emulate the approach because FDA’s strategy was based on the illiquidity of small

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