“Trading or investing with a small capital? Discover strategies, tips, and the importance of clear objectives for success. Start with limited funds and grow your wealth systematically.”
Should limited cash on hand deter you from trading or making investments? Well, nearly everyone feels a scarcity of money no matter what their financial standing is. Think of your money like your army. You send them out to win more money back, and if your strategy fails, you lose your precious soldiers. So, with a limited army, what would you like to do? Let us discuss trading first.
Before you decide to trade, know your objectives well. Like any other activity, there must be reasons why you want to take some action as you do. Trading with a small capital can be undertaken for either of the two reasons:
i. High-risk high returns trades: High-risk trades can give good profits but also hold the possibility to result in high losses . Knowing that you want to walk the risky road, your prudence makes you allocate a small capital for such trades. And to venture out for the first time, it’s always better to start small.
ii. Consistent returns: It may so happen that you have a smaller quantity of surplus funds at your disposal, but you want to earn consistent returns from whatever amount you invest. This goal requires a different kind of study and exercise of caution to make sure your initial capital does not get eroded.
For those wanting to earn returns in a medium-term time frame, positional trading, after some studying can be a good option. According to indiacharts.com, Positional trading is the long-term trend-following approach where traders hold onto their positions for more than a day, weeks, or even months. This decision-making is based on the Fundamental study of companies and prediction based on technical analysis. Technical analysis involves the study of chart patterns of market data and the use of several market indicators. Earning money through this method requires study and practice and also some amount of risk-taking appetite.
Knowing your reason for choosing to trade with a small capital is so important to make sure you make the most of your capital. If there is any lack of clarity, stop and seek that clarity before you send your ‘soldiers’ out to battle for you.
i. Plan with Knowledge: On achieving clarity on your objective for trading, if you seek knowledge and plan using that knowledge, you will definitely be closer to success. Seek help for gaining knowledge, for knowledge, does not only mean bookish knowledge but also practical experience. Mentors play an important part in this aspect. Discuss and clarify to understand well, so that your plan is near-perfect.
ii. Strong foundation: Study is the most important thing when it comes to trading, as you will act in accordance with the study. Understanding concepts, practicing them, and back-testing sufficiently will make sure you succeed.
iii. Avoid 3 to 5 min trades at the beginning: For achieving consistent returns, while 3 to 5 min trades offer an opportunity to make money on a more consistence basis by buying low and selling high, they are high-risk trades. Even after learning technical analysis, one must take time to understand which strategy works by back-testing the same, and only then go in for 3 to 5 min trades.
iv. Pick relatively low-risk trades: When aiming for consistent returns, picking low-risk and low-return trades is advisable. While your theoretical concepts may be very strong, equity markets have a high-risk element and therefore it is advisable to start small and with low-risk trades.
Talking about investments, some amount of capital is definitely required, but it need not be a large sum. With a small capital too, one can begin the process of investment. Investing allows your money to grow without a lot of hard work on your side.
Again, the term small capital is subjective, so let us consider a figure say, Rs. 1,000, available every month for investments. Let’s try to understand the different ways through which one can invest this capital. Most importantly remember investing should be like a ‘HABIT’.
i. Investing in mutual funds through systematic investment plans (SIPs): Mutual funds, as defined by the Oxford dictionary, are professionally managed investment programs that trade in diversified holdings. A monthly SIP of Rs. 1000, in the long term (say more than 5 – 7 years) can give good returns. One can redeem part of the funds if required early by paying some fee (called an exit load). There are several kinds of mutual funds available in the market and one should read the terms and consult an investment advisor before actually investing. Several factors like your risk profile, investment horizon, and purpose or goal of investment are required to be considered before investing.
ii. Investment in blue-chip companies: According to Investopedia, a blue-chip company is well-known, well-established, and well-capitalized. Such a company is considered to be a leading company in its sector and produces dominant goods or services. These are established and renowned companies and therefore have a lower risk of investment as contrasted with other companies. One challenge in investing in blue-chip companies could be that the share price of such companies may be higher than Rs. 1,000 in some cases. But one can always choose companies having a lower per-share price and keep purchasing shares of those multiple companies on a monthly basis. This method is likely to give good returns in the long-term (maybe 7 – 10 years) period.
Some tips for prudence while investing would be as follows:
i. Choose an investment idea based on your risk appetite: For some people, irrespective of the amount of money they had, investing in any kind of equity gives them pressure. And it is true that equity shares are a high-risk instrument. The reason is that the market rate fluctuates daily for listed companies. One day a share may be priced at Rs. 100, the next day at Rs. 80 or Rs. 120. Further, if the company one invests in goes bankrupt and liquidates, equity shareholders have no security or guarantee of receiving their money back. In such cases, one option would be to study equity markets, how they work, how to enter and exit a trade, etc. This may alleviate some fear, but if it doesn’t there are safer options to invest like government bonds or treasury bills.
ii. Review your investments from time to time: Many people misunderstand long-term investments to mean, ‘invest and forget’. Timely reviews are essential to make sure your investment decision is correct and on the desired path. Even the best of leaders go in for ‘course correction’ if they realize their ship has lost its bearing, this appropriately applies to your financial ship as well.
The quantum of capital matters little as long as one starts investing or trading. Trading with a clear purpose has the potential of returning your initial capital manifold times. Similarly, the long-term benefits of consistent investing are numerous. Be cautious, to ensure you maximize returns on every rupee invested. To put it in simple words ‘The amount you have for investment or trading is not important but what’s important is have your started ?’