The stock market allows investors to grow in several ways. Of various equity instruments in the market, one that attracts investors due to its return potential is small cap stocks.
These are stocks of firms that operate in markets with smaller capitalization. The market cap ranges between usually below ₹5000 crores.
This article aims to give information on what small-cap stocks are. It also provides the prospects of growth and the risks associated with investing in small-cap stocks.
What are Small Cap Stocks?
Small cap stocks are shares in companies with small capitalization. The value of the company or its market capitalization is calculated as the product of the share price and the quantity of the company’s outstanding shares of stock.
Small cap companies are generally new companies that are likely to expand in the coming years. They can be from different sectors of the economy. Investors can research and invest in them and diversify their portfolios with small cap funds. Some small cap companies also have stronger fundamentals, which can add value to portfolios.
Examples of small-cap companies in India are – Hindustan Motors, Swadeshi Polytex, Technvision Ven, etc.
Factors that Contribute to the Growth of Small Cap Stocks
Here are the major factors that contribute to growth of small cap stocks.
High Growth Potential
Small-cap stocks are majorly affiliated with firms, which are still in the development stage of their lifecycle. These companies may grow in the future by opening more offices, increasing market penetration, or providing more products or services. In doing so, investors stand to gain more funds and could also enjoy attractive returns as the company expands.
Innovation and Agility
Small companies are generally adaptable and creative in comparison to their large-scale counterparts. They can also develop new technologies and consequently introduce new specialties in a more cost-effective manner. It enables them to identify new trends and opportunities, which can result in them gaining new customers and higher returns. This may make them more profitable in the long run.
Potential for High Returns
Small-cap stocks often provide high returns compared to large and mid cap stocks. However, for this investors also have to accept the inherent risk of investing in small companies.
Risks Associated with Small Cap Stocks
Let’s see the risk associated with investing in small cap stocks.
Higher Volatility
Being more risky than large-cap stocks is another con of investing in small-cap stocks. The stock prices of small-cap businesses are highly volatile in the short term. They are determined by the volatility of the market, the volatility of the firm, and the volatility of the economy.
Limited Liquidity
Market liquidity is the ability to buy or sell a stock in the market instantly. Small-cap stocks have lower trading volumes, unlike large-cap stocks. Thus the volume of stocks bought or sold may impact the overall liquidity and the ability to close a position.
Market Susceptibility
Such players are also more sensitive to market factors and economic fluctuations compared to large-cap players. It may not have the funds and stability to navigate unfavorable periods. They could be more vulnerable to periodical and unpredictable changes in the market and business.
Conclusion
When assessing the risks and returns of small-cap stocks, it is important to note that these companies have higher risks but also the potential for higher gains. Thus, managing high return expectations along with an understanding of risk levels is critical for new investors to invest in this category of stocks. As always, it is crucial that you diversify your portfolio to reduce the overall risk. #hydnews #khabarlive
