he stock market of the 1980s gave Steve Scott the Midas touch.

With the help of an inheritance his grandfather had given him years ago, Scott turned to the stock market in August 1982. The ensuing bonanza on Wall Street parlayed his $30,000 investment into $40,000 by April 1983, giving him a tidy return of 33 percent in less than nine months.

Today, the 36-year-old Boston lawyer still trades stocks, but far less frequently. "I'm not pleased with the market," he said. "The mechanics of the market have become so complicated that I can't keep up with it, so I don't even bother."

Scott fits perfectly the profile of an average individual investor: a white male 30 to 60 years old, college educated, with a household income ranging from $50,000 to $200,000. The typical individual's portfolio has an average value of $86,000, includes shares in six companies and has a stock traded three times a year.

But Scott is typical of the small invester in another way: He is getting out of the market. The question is, except for the Wall Street firms that earn commissions from the business of individual stock traders, does anyone, or should anyone, really care?

The departure of the individual investor goes far beyond temporary disenchantment with the economy or loss of confidence stemming from 1987 and 1989 stock market plunges. Contrary to the alarms being sounded by many major brokerage firms these days, the individual investor has been exiting the market steadily as a direct stock owner since the 1950s. The trend has gone hand-in-hand with the steady expansion during the same period of huge institutional investors, professionals who trade on behalf of giant stock buyers such as pension funds, insurance companies or other large corporations.

Individuals have taken some of the money they had invested and funneled it into mutual funds. But the flow of money out of direct ownership has not gone dollar-for-dollar back into mutual funds, said Jeffrey Schaefer, economist for the Securities Industry Association, the chief trade group for brokerage firms.

In 1989, for example, there was a net sell-off by individuals on the New York Stock Exchange of $18 billion, but an influx of only $11 billion into mutual funds by this same group. "Individuals are more or less big sellers of equities," Schaefer said.

By many other measures, it's the same story. In 1952, individuals accounted for 70 percent of the volume of public trading, institutional investors for 30 percent. Today, that ratio is reversed. Ironically, because mutual funds essentially are institutional investors trading in bulk on behalf of lots of small investors, their rise has only helped to augment the trend toward institutional dominance of the markets.

Certainly, not everyone believes that the small investor's decision to drop out of the market as a direct owner is a bad thing: Individuals, they argue, have simply wised up to the reality that they can't do well in a market dominated by professional investors and are better off in a mutual fund or some other indirect means of tapping into the market.

"I just don't think it's a big problem," said Joseph A. Grundfest, a former commissioner at the Securities and Exchange Commission and now a professor of business at Stanford University in California.

But many market experts and economists warn the departure of the individual investor has serious implications for the economy because it helps make the stock market more volatile and ultimately makes it harder for some companies to get the capital they need to run and expand their businesses. That, in turn, hurts American competitiveness, especially in innovative areas such as high technology, they argue.

"The evidence suggests that small investors who buy and hold a reasonably diversified group of securities have performed well relative to institutional investors, including mutual funds, which tend to buy and sell," said Federal Reserve Board Governor David Mullins, on leave from the Harvard Business School and one of the authors of the Brady Report, which studied the stock market crash of 1987 for President Reagan.

Mullins said that while academic or government research is thin regarding the effect of the small investor's exit, "common sense and logic can still be helpful." The trend, he said, "is not dire news, but it's not good news, either."

Small Firms Hurt One consequence is that smaller companies, generally viewed as riskier investments by institutional investors, can be especially hard hit, according to the research of Cornell University finance professor Avner Arbel. One of the few academicians who specializes in the small investor issue, Arbel has divided publicly traded companies into 10 categories based on size. His research shows that, on average, institutional investors hold 50 percent or more of the stock of the largest companies and less than 30 percent of the stock of the smallest 20 percent of the companies.

Though some mutual funds focus on investing in smaller companies, this is not sufficient to counter the trend, said Jordan E. Goodman, who helps oversee Money magazine's index on the trends and attitudes of individual investors. The result is that medium- to smaller-size firms have to pay higher dividends on stock or higher interest on bonds to compensate investors for the greater exposure they have to wild price swings that result from so few investors trading in their stock, some analysts say.

"This is extremely important," said Arbel. "It's disastrous."

When the Apple Computers and MCIs of the world are first started, they often are funded by venture capital, Arbel and others say. Once they become big, established companies, large institutional investors move in. It's the step in between, during the transition from a start-up firm to a market mainstay, that traditionally has been supported with funds from individual investors, they say.

According to Arbel, only 1.3 percent of Apple Computer Inc.'s shares were held by financial institutions in 1981. Now, institutions hold 68 percent. "If small investors had not been there to finance the personal computer revolution, we wouldn't have had it," Arbel argued.

Institutional investors often have so much money to invest that buying into a smaller-size company isn't efficient. Large-scale purchases would end up swallowing so much of the stock that it would boost the stock's price.

Lost Opportunities A second consequence of the small investor's exit is that by abandoning direct ownership of stock, individuals are passing up important opportunities to increase wealth. The stock market has proven over the last century to be a generator of one of the highest returns on investment for individuals who hold a mix of 20 or 25 stocks for long periods, say for five to 10 years or more.

A third factor: Some experts believe the small investor's departure may be making the market more volatile -- subject to sharper swings in stock prices. Volatility is to be avoided, Mullins, SEC officials and others say, when it results from the mechanical difficulty of selling large blocks of stock, defined as 10,000 shares or more.

By definition, a liquid market is one where stock can be bought or sold without causing sharp price fluctuations. Absent a range of large and small buyers, this group argues, it becomes harder to complete a trade, often forcing artificially large swings in stock prices in order to complete a trade and thus making the market more brittle. It is this effect that the individual's departure has augmented, many market experts say.

John Shoven, director of the center for economic policy research at Stanford University, is, however, among those who challenge the widely held notion that the market is more volatile than it used to be. Ernest Bloch, a professor at New York University's Stern School of Business, agrees, citing a recent study at the Federal Reserve Bank of Kansas City that said market volatility has remained the same since World War II, as a percentage of the market's total value. Besides, Bloch and others say volatility isn't bad because it presents profit opportunities for those who can detect if a stock is over- or under-priced.

Although volatility has remained fairly constant over the years, said Mullins, it's the cause of the price swings that is of concern. "Volatility is not bad if it is based on real information," such as the potential for war or a rise in oil prices, as has been the case in recent weeks, Mullins said.

But in the 1980s, volatility too often occurred for purely administrative reasons, because of problems with the market mechanism of executing trades, problems that overloaded the system, bogged it down and caused wide swings in prices, as was the case in the sharp market declines in 1987 and 1989.

That type of volatility produces risk that scares individuals away, producing markets that are not efficient, well-run pricing mechanisms, Mullins and others say.

Steadying Influence The small investor is an important, steady source of funding for the market, a segment less prone to the constant, sometimes destabilizing buying and selling that institutional investors tend to follow, this group contends.

Not surprisingly, Wall Street investment firms, now facing a severe profit crunch following the demise of the 1980s bull market, agree. They have been making an all-out effort to lure back the small investor. Warning that the individual stock owner is key to keeping the pricing mechanism of the market running smoothly, they have backed regulatory moves by the SEC to dampen market swings.

Grundfest and others regard such warnings from Wall Street largely as self-serving statements from an industry that longs for the bygone days when the individual dominated the market. "I think Wall Street's primary argument is that they want those {sales} commissions," said Larry Siegel, managing director of Ibbotson Associates, an investment research and consulting firm in Chicago.

Sincere or not, it could take some doing before the brokerage firms, or anyone else, persuade small investors that a return to the market is in their own best interest.

A recent survey by the New York Stock Exchange found eight of 10 individual investors would "be more likely to invest in individual stocks if market volatility is once again attributable to the underlying value of the stocks rather than program trading," the large, computer-orchestrated trades undertaken automatically under certain conditions on behalf of institutional investors. A survey by the American Stock Exchange had similar findings. "Factors ... specific to the image of the business and the exchanges caused more concern" than the stock market plunge of 1987 in causing investors jitters, it found.

But the reasons for the individ- ual's exodus extend beyond market volatility, according to those that have studied the trend.

Americans have saved less in recent decades, giving them less to invest. In addition, the aging of the population has meant those with money to invest have become more averse to risk, which tends to steer them away from stocks and into any one of dozens of other investment vehicles that have sprung up in recent years. The younger generation has become prey to rises in real estate prices that for years outstripped rises in income, forcing them to put a larger portion of their savings into home buying.

And, the inflation and economic turmoil of late 1970s and early 1980s led to increased consumer and media focus on the economy, which in turn fostered a greater level of financial sophistication by the public.

In the 1950s, the motto of the New York Stock Exchange was, "Own Your Share of American Business." Now, however, increasingly savvy consumers know that the risk of operating individually has risen with the complexity of the market. Diversification is an investment strategy that institutional investors, with their vast pool of funds, can easily attain. For the individual investor, it's harder. He or she needs at least $40,000 to $50,000 to diversify holdings enough to minimize vulnerability to sudden swings in the price of one stock.

Questions of Fairness But more problematic than the financial barrier to entry is the disillusionment many individual investors feel about the fairness of the market, about their ability to compete on equal footing with Wall Street's insiders, who have information the average investor can't hope to match -- even with a home computer hooked up to track daily market prices and subscriptions to dozens of market newsletters.

"I've been in the market for 25 years," said Robert A. Warren of Fairfax Station, an engineer at the Department of Defense who is fighting his broker over whether his trades were executed correctly during the 1989 mini-crash of the market.

"I know now I cannot win in this investment situation," Warren said. "The big transactions get taken care of first. I don't mind volatility per se. That can give me something to play with. But I do mind that I'm not on a level playing field."