The Stock Market Free Fall – How to Save Yourself

A concerning trend is emerging in India’s small- and mid-cap stock markets, where investors chasing quick gains might find themselves trapped in plummeting, low-float stocks. Despite repeated warnings from regulators, retail investors—drawn in by the impressive returns of previous years—poured money into these stocks, both directly and through equity schemes. This frenzy drove prices and valuations to unsustainable levels, especially for stocks with limited “free float” (shares available for public trading). Even after significant declines, valuations remain high, and if the downtrend continues, investors could face liquidity issues, watching their investments shrink.

The Securities and Exchange Board of India (SEBI) had instructed fund houses to conduct regular stress tests to assess liquidity and risk. This move triggered a market correction in the December quarter, as both institutional and retail investors pulled back from illiquid, low-float stocks. But for those still holding on, the risks have only grown. This highlights why it is essential to invest in share market with a well-planned strategy rather than chasing short-term gains.

In the first half of the fiscal year, low-float mid- and small-cap stocks saw a surge, attracting retail investors. But many of these stocks have since taken a nosedive, exposing the risks. If the broader mid- and small-cap segment keeps sliding, retail investors—especially those stuck in stocks with limited free float—could be locked in for the long haul. This situation underlines the importance of investment stock market knowledge and understanding market trends before making decisions.

The numbers paint a grim picture. A massive chunk of mid-cap and small-cap stocks have tumbled far from their 52-week highs. The common denominator? Insufficient free float. This scenario serves as a warning for those looking for the best app to invest in stocks, as making uninformed investments without proper research can lead to significant losses.

The Real Shocker

Retail investors are taking the hardest hit. Since they became the biggest shareholders after promoters, these stocks seemed like the golden ticket back then. But heavy reliance on retail participation makes individual investors far more vulnerable to market downturns than institutional players.

On the other hand, domestic institutional investors, like mutual funds, have largely steered clear of these low-float stocks. Their portfolios stay highly liquid, insulating them from potential liquidity crises. This stark contrast is a wake-up call for retail investors: caution is key when dealing with illiquid mid- and small-cap stocks. Being selective is non-negotiable. Those investing stocks need to diversify and avoid putting all their money into highly volatile low-float stocks.

The Takeaway?

Your entry point matters. Jumping in at sky-high valuations can mean waiting forever for decent returns—no matter the asset class. Understanding what you’re paying and whether the valuation holds up is crucial. Retail investors need to tread carefully to avoid getting stuck in a liquidity trap. Whether you are looking for the best app to invest in stocks or planning your investment stock market strategy, research and patience are crucial for success.