Small Cap Stocks: An Opportunity To Pick Multibagger Stocks.
Investors invest in different stocks depending upon their investment objective and risk appetite. For an investor, a diversified stock portfolio will help in reducing the risk and maximizing return. A good way to add diversification to your stock portfolio is a mixture of large-cap, mid-cap, and small-cap. A large cap refers to a company with market capitalization of more than $10 billion or above Rs 20,000 crores. A mid-cap refers to a company with a market capitalization of between Rs, 5,000 crore and Rs 20,000 crore is considered as the mid-cap. A small cap refers to a company with a market capitalization of less than Rs 5,000 crores.
Small-Cap Stocks and their characteristics:
A small-cap stock is a publicly traded company whose market capitalization is less than Rs 5,000 crores. Investing in small-cap stocks successfully means an understanding of the risk as well as the separation of good investment from a bad investment. Let’s look at some of the features of small-cap stocks:
- Returns: The small-cap shares are counted among the top-yielding investment options. They have the potential to become multibaggers in future with 100% returns.
- Risk: The risk associated with small-cap stocks is high. The small-cap stocks have an unreliable and faulty business model, which may fail. These stocks are affected by market recession and take time to recover.
- Volatility: These stocks are more volatile compared to large stocks. Higher volatility results in higher risk. Volatility in the stock may negatively impact the stocks in the future.
- Low Trading Volume: A large-cap stock generates a lot of investor interest compared to the small-cap stock. Due to less investor interest, it has the lowest trading volume.
- Time-consuming: Investing in the small-cap stocks is always time-consuming. Due to less information available in the public domain.
Let’s look at the benefits of investing in Small-Cap Stocks:
- High Growth Potential: Small-cap stocks have a higher growth potential. Large-cap companies have limited growth. but in the case of small cap stocks, there is no such cap. Hence, they have a lot of potentials to grow.
- Diversification: Small-cap stocks provide enough room for diversification in the fund’s portfolio as during the bear period, when the large-cap stocks don’t perform, the small cap does.
- Focused and low-price quality stocks: Small cap stocks tend to be more focused compared to the large-cap due to size and business operations. As most of these haven’t been exposed to new lines of business. Hence, there may be chances of quality stocks at a low price.
To better understand small cap stocks, let’s compare it with Large cap stocks:
- Market Size: Large cap stocks are having a market capitalization of more than Rs 20,000 crore, whereas small-cap stocks are having market capitalization of less than Rs 5000 crore.
- Risk: Large-cap stocks are considered to be less risky. The risk associated with small-cap stocks is considered to be highly risky.
- Business Stability: The business stability associated with the large cap is relatively high. While in the case of small-cap stock, the stability associated with them is relatively low.
- Growth Potential: The growth potential with large-cap stocks is relatively small. While the growth potential with small-cap stocks is relatively high.
- Availability of information: Large-cap stocks have a high level of availability of information, as most of them are in the public domain for quite a long time. But in the case of small-cap stocks, not much information is in the public domain.
Anyone who has a higher risk appetite and wants to diversify their portfolio, then they can invest in small-cap stocks. Small-cap stocks may give higher returns and become multibagger stocks. But here are few tips to pick small-cap stocks:
Identify the opportunities: One needs to first identify which stocks are currently trading at low PE, Market cap. Look at the PE value through various stocks scanner. Do a little bit of research.
Capitalize on the opportunities: Any trading opportunity must be set on the basic rule “Buy low and sell High ‘’. Therefore, as soon as you list out on the stocks you can buy it.
Hold and watch: Good small-cap shares can give enormous profit if it is held for long. It may double, triple your investment within a year or so.
*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing