Small Cap Stocks

Small-cap stocks are the respective shares of the companies that comprise a market capitalization below Rs. 5,000 Crore. As per SEBI, the listed companies which are ranked above 251 in the Indian stock exchanges (NSE & BSE) in the terms of market capitalization are said to be Small-Cap Stocks. Investors who want to generate higher returns from their investments or those investors who have high risk-taking capacity tend to find Small-cap stocks as a better investment option. Nifty has a benchmark Small-cap Index in India known as Nifty Smallcap 50 which holds the top 50 most traded small-cap stocks in the market. Small-cap stocks are volatile in nature and are prone to market risks. Investors can manage this risk by adding market-friendly investments to their portfolios.

The Key features of Small-cap Stocks are:

Volatility: The value of stocks of small caps is dependent on fluctuations in the market, which makes the stocks highly volatile. Hence, small-cap stocks tend to perform well during market uptrends or bull-market and underperform when the market struggles or bear-market.

Risk: Since the stocks of small caps are dependent on market fluctuations, they tend to be affected more during the times when the market is hit – such as during recession and take time to recover from them. Such market behavior makes the investment in small-cap stocks a riskier investment.

Return on investments: The share value of small-cap stocks is relatively small, but can increase two or threefold quickly. They can potentially become multi-baggers and yield more than 100% returns.

Cost of the Investment: Small-cap stocks are cheap in price compared to large and mid-cap stocks. So investors can easily purchase them.

Some of the reasons why you should invest in small-cap stocks:

Higher growth potential: Historically, small-cap stocks have performed better than large caps in terms of growth. Small-cap stocks offer higher growth potential and may require capital to enhance their growth prospects.

Fairly priced shares: Institutional Investors like FIIs and DIIs try to avoid buying a large amount of small-cap stocks which makes them fairly priced.

Quality stocks at low prices: Small-cap stocks are manier times under-rated, and their shares are undervalued due to possible inefficiencies in the market. Hence, with some research and analysis of the market, investors can benefit by acquiring good quality stocks found at low prices.

The Drawbacks of Small-cap stocks are:

Riskier: Small-cap stocks are prone to market risks and are riskier investments compared to mid and large-cap stocks, which can be reduced through portfolio diversification.

Less Liquid: Small-cap stocks are less liquid or harder to sell because there are smaller pools of investors interested in these companies.