More and more people are getting into trading and investment these days to increase their wealth. However, it not only involves profits but also risks of losses. Among the risks, the significant percentage of low-volume investment and stock trading is very concerning. Maybe, you are impatient, and that is why you do not want to wait until you have a capital of at least $10,000, but with that kind of low amount, you can only invest in low-volume stocks. You need to know the risks you will be facing by investing in low-volume stocks. Let’s begin.
Liquidity allows you to buy or sell an asset in the financial markets quickly without a change in price. It means that you can buy and sell a stock trading at a certain price in big numbers while still maintaining the price. Lack of liquidity is a crucial risk for stock traders, and you are bound to face this problem if you trade with low-volume stocks. Low liquidity also leads to high bid-ask spreads, which is a huge problem for smaller investors. When liquidity is low, you will lose money frequently.
Challenges in taking profit
When trading volume is lacking, it signals interest from just a few participants of the market who can command a premium for such stock trading. Even if you sit on unrealized gains, you may not be able to take profits. Let’s assume that a trader bought 10,000 shares of a company one year ago. The price was $10 back then, and now it is $13. Therefore, the trader is having 30% unrealized profit. Now, they will obviously want to sell the shares to take the gains. However, if the average daily trading volume is only 100 shares for this stock, it will take time for the trader to sell all stocks at the market price. Moreover, the prices will also be affected. When you flood the market with a large supply stock, the prices can fall significantly.
Manipulative market makers
Market makers that are active in low-volume stocks are able to utilize low liquidity for earning profits. They know very well that they can take advantage of buyers eager to get in and out of the market if the stock has low liquidity.
For instance, let’s assume that a market maker has placed a bid for 100 shares near the last sale price, and another bid of 1,000 shares is placed at 10% below the price. Now, if someone is naive enough to try and sell all 1,000 shares at the market price, then the only time they will get the expected price is for the first 100 shares. The rest, however, will offer 10% less. If you want to avoid these losses, then you have to use limit orders for low-volume stocks.
Vulnerability to marketing misconduct
Dishonest salespeople and brokers use low volume stocks to make cold calls. They claim to have insider information on the next so-called tenbagger. Scammers also publish fraudulent press releases and lie about prospects for high returns. There are many individual investors who believe these frauds, and after that, they have to suffer the losses.
Apart from the risks of trading with low-volume stocks, you must never forget that there are many types of expenses involved with investments, like fees and commissions, performance fees, and more. If you want to manage everything well, then you need a decent amount of money, to begin with. You will also have to consider the fact that you have to face losses, and you need money to support your account at that time. So, it is best not to invest in stocks or shares if you have less than $10,000.
How to start investing small?
So, no investment in stocks and shares, but there are other options you may go for with a low amount until you save up $10,000. Let us look at each of them.
Trade using simulators
Would-be investors from all around the world exercise investing without using real money, which is known as paper trading or virtual stock trading.
|You can use stock simulators for free.||A chance of derailing from too much expectation.|
|There is no age or usage limit.||No risk in virtual trade, but live trading is risky.|
|You do not risk real-time resources to lose.||Sneaky agents and brokers.|
|You can sharpen your skills with new techniques.||Unseen factors like resistance, and other sorts of hindrance.|
|It leaves chances for the next big development.|
Invest in ETFs
An exchange-traded fund or ETF is a basket of securities investors buy or sell through a stock exchange or brokerage firm.
|Provides diversification||Commissions may erode returns.|
|Easy to trade||Small-volume ETFs create higher bid-ask spreads.|
|Tax-efficient||ETFs holding precious metals are taxed higher.|
|Low expense ratios|
|Exposure to all assets at different levels|
|Some ETFs offer call and put options.|
The foreign exchange market is a global decentralized market where you can trade currencies.
|Leverage||Lighter regulatory protection|
|Potential for fast returns||Fewer residual returns|
|Easy short selling|
|Less potential for insider price manipulation|
|Fewer fees and commissions|
|Simple tax rules|
Start a retirement account
Individuals can plan for their retirement by opening a retirement account that helps in lowering the tax bill.
|Opportunity to diversify across asset classes||Best suited for early investors|
|Benefits of long-term investing|
|Tax-free money-saving for decades|
These are some of the alternatives you can take with a low amount of capital. Consider the pros and cons of each option and learn about them in detail before you make a decision. No matter what you do, you must keep in mind that the risks of losing money will always be there. It does not mean that you will not make any change in increasing your wealth. You just have to learn better risk management and be cautious during any kind of investment.