Many new retail investors and traders enter the stock market with a dream of making big money. They have heard many stories of rags to riches about people creating massive wealth by investing in the stock market. But is it really possible? Can retail investors and traders earn profit from small capital in the stock market?
Anybody can make a profit!
First things first, it is absolutely possible to earn profit in the stock market as long as you are good at stock analysis. To learn more on how to analyze stocks, visit the article – Tools to analyze the stock market! Profits can be made in the stock market regardless of the size of the investor’s capital. However, profits in the stock market are based on the percentage return, not absolute returns! So, the amount of profits will depend on the size of the investor’s capital.
Let’s consider an example. If Ram invested Rs. 5 Crore in the stock market and got a 10% annual return on his investment, he just made Rs. 50 Lakhs in profits. Shyam invested Rs. 5000 in the stock market and got a 100% annual return on his investment, he only made Rs. 5000 in profits. The returns in the stock market depend on both the size of the capital as well as the rate of return of the investment. Since retail investors and traders start their investment journey with a small capital, they will make lower profit as compared to big funds who have a huge capital. But isn’t it possible to make big profits by investing in risky stocks? Can a higher rate of return compensate for the retailer’s small capital?
Mistakes retailers make when chasing big profits
This is one of the biggest mistakes which new retail investors and traders make when they enter the stock market. Retailers do not (or cannot) invest big capital in the stock market, so it seems logical to take more risks to make big profits in the stock market. However, this is the best way to lose money in the stock market! Many retailers make one of the following mistakes when investing or trading small capital.
- They invest in very risky unknown companies thinking that higher risk means higher rewards. While this is true to some extent, most retailers end up losing most of their capital because of the high risk nature of such companies (most of these companies will fail, hence they are called high risk companies)
- They take big loans or margin to invest (or trade) in the stock market. This is extremely dangerous because even a minor correction can kick the retailer out of the stock market forever due to high leverage.
- They start options trading (especially buying options) because options are much more volatile than stocks and can provide a much higher return than stocks. However, it also means that when the trade goes wrong, the trader ends up losing a lot more money than trading stocks!
Now that we know that going for riskier investments is not the right way to invest small capital, what can retailers do to make big wealth from the stock market?
How to make big wealth from the stock market as a retailer?
Even though the profit depends on the size of the capital invested, there are some ways to build big wealth which retailers can follow.
- Retail traders have some advantages over mutual funds due to their small capital. Having a small capital makes you invisible in the stock market which means that it is much easier to enter and exit trades at precise points increasing the returns from trading. Big funds are big enough to move the market which acts against them when it comes to trading. To learn more about what advantages retail investors have over big funds, read this article!
- Regular investments in the form of SIP (or lumpsum) in the stock market will build a big portfolio over time. Many retail investors invest a small amount in the stock market & expect big returns which is not possible. A regular investment of smaller amounts can lead to big wealth in the future due to the power of compound interest.
- A small portion invested in mid and small cap stocks can be a good way for retail investors to boost their rate of return from the stock market. However, this can be extremely risky because many small or mid cap stocks fail over the long term. An investor needs to be great at analyzing stocks to invest properly in small/mid cap stocks.
- Everyone makes mistakes in the stock market. But the person with the biggest wealth is often the one who makes the least mistakes in the market. Avoid mistakes such as investing in an extremely risky company or trading future and options without proper knowledge. You cannot make any profit if you lose your initial capital! Learn more about the mistakes which retailers make in the stock market in this article.
Making wealth in the stock market is definitely possible, even for retail investors and traders with small capital. The secret is simple – consistently investing small sums into the stock market and having patience. Stock market is not a get rich quick scheme, it builds wealth over time for people who have the patience to stay in the stock market. Building wealth is not a sprint, but a marathon!
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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