Companies with a market capitalisation less than Rs. 500 Crore are categorised as small-cap companies. Over 95% of Indian companies are considered as small-caps.
This type of companies holds a rank above 251 and tends to perform during the initial phase of economic recovery and the stocks issued by such companies are termed as small-cap stocks.
Small-cap stocks or small-cap equity are stocks of small-cap companies that are publicly traded in a stock exchange.
Investors, who want to generate higher returns from their investments, tend to find small-cap stocks a suitable option for them. Additionally, individuals who have a high-risk tolerance level and can bear exposure to market risks may consider this investment option.
These stocks are volatile in nature and are prone to market risks when the market is going through a low phase. However, investors can cushion the risk factor associated with small-cap stocks by adding market-friendly investments in their portfolio.
Individuals who want to invest in small-cap stocks should learn about these following features –
There are three compelling reasons why an investor can consider putting their money into small-cap stocks.
Those reasons are –
Individuals who invest in the best small-cap stocks investors avail these advantages mentioned below –
When compared to large-cap companies, small-cap companies tend to have a better organic growth rate. Unlike them, small-cap companies have a greater potential to grow and acquire capital in due time. This particular aspect works in favour of small-cap stocks and enhances their growth potential to a significant extent.
Major institutional investors have to adhere to certain limitations when it comes to investing in best small-cap stocks; it directly restricts their power to push the stock prices upwards. This offers small investors advantage over institutional investors and allows them to avail small-cap shares at fair prices.
Small-cap companies are under-recognised, and their stocks are under-priced owing to probable market inefficiencies. Investors can benefit from such inefficiencies with a little research and market evaluation by acquiring quality stocks that are being offered at a lower price.
The risks associated with investing in small-cap stocks in India are listed below –
Though small-cap stocks generate better returns, they come with a significant risk burden. Risk-averse individuals or conservative investors would not be suited for such investment options. They should also understand that they cannot avail the benefits of availing higher returns through small caps.
On another note, if investors do not have a sturdy risk appetite to weather the market fluctuations, they may opt for a less risky investment option.
Investors can put their money into these alternative investment avenues –
Whether it is small-cap stocks or Mutual Funds, investors should always opt for an investment avenue that suits their requirements and their financial standing.
Additionally, investors should take into account their risk appetite before investing and allocate their investments accordingly.
However, if individuals are not very well-versed with their market knowledge, they always have the option to seek professional assistance.