The stock market Squid Game: Who's at risk, who gets hurt, and how to save your skin

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Subscribe to enjoy similar stories. In the Netflix thriller Squid Game, a group of people sign up to play and win a fortune, only to find themselves trapped in a bloodbath. A similar game may be unfolding in India's small- and mid-cap stocks space, where investors who bet on instant riches may struggle to exit free-falling low-float stocks.

Blinded by the returns of previous years, small investors rushed headlong into these stocks directly and through equity schemes, ignoring warnings from the market regulator. Prices and valuations soared, particularly of stocks with inadequate "free float"—the portion of shares available for public trading. Even after a steep fall, their valuations remain high, and if the slide continues as expected, investors may find themselves trapped in illiquidity, watching their fortunes fade.

The Securities and Exchange Board of India (Sebi) had mandated fund houses to conduct regular stress tests—assessments of liquidity and risk parameters. This led to a notable market adjustment in the December quarter, as both domestic institutions and individual investors reduced their stakes in illiquid, low-float equities. For those remaining, the risks may be higher now.

“Over the past two quarters (Q1 and Q2), we saw some run-up in low-float mid- and small-cap stocks. This lured many retail investors but many have now seen sharp corrections. The risk is not off the table yet," said Nirav Karkera, head of research at Fisdom, a digital wealth management platform.

Also read: While the big bulls have moved on, retail investors are stuck holding the debris Anand K. Rathi, co-founder of investment platform MIRA Money, echoed similar concerns. “Free float has always been a concern, especially for small-caps