All You Need To Know About SmallCap Stocks

Equity market investments have grown leaps and bounds in the past few years. The new investors entering the stock market have a fancy for investing in smallcap stocks. However, despite being popular they fail to possess a good image owing to the nature of the business they are in and the risk that is associated with them.

While the risk associated with these stocks is high, one should not forget that all the bluechip and largecap companies today were once smallcap firms. Thus, these firms have a high potential of exhibiting exponential growth and generating spectacular returns over the years.

Let us understand all we need to know about the them.

What are Smallcap Stocks?

Smallcap companies are classified on the basis of two broad parameters. The categorization is done with the objective of distinguishing these stocks for investors, institutions and mutual fund houses.

According to SEBI (the Securities and Exchange Board of India), the top 100 companies selected on the basis of average market capitalization are classified as large-cap companies. While the companies falling in the 101^st to 250^th position are classified as midcap companies.

The remaining companies falling beyond 250^th position are categorized as smallcap companies. The list of these companies is revised by SEBI in every six months following which the mutual fund houses need to revise their scheme portfolios.

The other way of classifying smallcap companies is on the basis of their market capitalization. If a company’s market capitalization is less than Rs.5,000 crore. Over 95% of the companies in India fall in the last category making it altogether difficult for investors to pick the right stocks.

SmallCap Stock Features

All the investors who are keen about learning in the smallcap stocks need to understand the features of such counters. Here are some features of these stocks listed for you to learn more:

Volatility

Smallcap stocks are highly volatile in nature and are highly influenced by market phenomenon, news and market fluctuations. Thus, it is quite possible that these stocks can represent a steep rise or fall in a quick succession.

Risk

Smallcap stocks are volatile and hence have a high risk profile. These stocks are dependent on the market and hence are susceptible to market fluctuations. These stocks are more prone to be affected by market recession and hence take more time to recover. Since the risk is high the returns are higher as well. This is the reason why suchstocks are left behind when the market is in recession.

Returns

Smallcap stocks are considered to be among the most top-yielding investment options. They have the potential of emerging as the multi-bagger stocks yielding over 100% returns.

Investment Horizon

Investors in India can invest in smallcap stocks for the long term as well as for the short term. However, it is beneficial to choose these stocks for the long-term horizon. This helps in spreading the risk associated with these stocks and helps in generating substantial returns.

Why Should You Invest in Smallcap Stocks?

There are three main reasons for investing in smallcap stocks. These reasons compel the investors to put their hard-earned money in these stocks.

These reasons are:

• Benefiting from the growth potential of small-cap companies
• Investing in quality stocks at a low price owing to the market’s influence
• It offers an opportunity to invest in smallcap stocks at a fair price that are free from the influence of large financial institutions

Advantages of SmallCap Stocks

Smallcap stocks offer a bunch of advantages to the investors despite being associated with a higher risk profile. All the large-cap companies which people prefer investing in started as a small business. Here are some of the advantages offered by these stocks to investors.

• Smaller companies tend to have a better organic growth potential. Thus, smallcap companies have a higher growth potential and acquire capital in due time.
• Majority of the institutional investors adhere to certain limitations when it comes to investing in the smallcap stocks. Thus, they fail to push the prices. Hence, small investors are able to buy the smallcap stocks at fair prices.
• Many small companies are under-recognized making them unpopular among many investors. Thus, such companies trade at underpriced valuations. However, not all small companies are not worth investing. Many a times investors end up putting their money in some of the best companies at a low price.

Bottom Line

The first and the foremost advantage of investing in smallcap stocks is the significant upside growth potential that larger companies fail to offer. Smallcap companies are a way to boost returns for investors. Investors can easily put their money in these stocks using various brokers’ online stock trading facilities.

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