When investors invest in the share market, they usually have options to choose from large-cap stocks, mid-cap stocks, and small-cap stocks. The word ‘cap’ stands for market capitalization – a significant indication of a company’s size. As the name suggests, large-cap stocks are shares of big, established corporations, offering steady income through dividends. Similarly, small caps are new companies with smaller capital sizes. Since these companies have lower capital bases and are often new, they are susceptible to market volatility. However, these stocks can turn into multibaggers and generate significant returns for investors.
Investing in small-cap stocks is suitable for aggressive investors. These stocks tend to perform well when the overall economy does well. But also contract fast during a downtrend. Identifying small-cap stocks with growth potential may require unique skills and extensive knowledge.
What is small-cap?
Companies are classified based on their market capitalization value. Usually, companies with a market cap of Rs 5000 crore or less are small-caps. They are listed on the stock exchanges from 251-500.
Small-cap stocks provide exposure to industries that are included in large companies.
NSE Smallcap 250 represents the remaining 250 companies from NIFTY 500. Likewise, BS Smallcap is the small-cap index of the Bombay Stock Exchange.
Let’s look at some small-cap stocks suitable to add to your portfolio.
The company is a specialty chemical company that is the sole manufacturer of Aliphatic Amines in India.
The Indian chemical industry is highly regulated and has a high entry barrier, so it is not easy for new entrants to compete with established companies like Balaji Amines.
Financially, the company has a steady track record and managed a 27 percent increase in profit.
Before investing, track Balaji Amines Share price.
The company is engaged in healthcare, offering various pathological services. They have consistently generated 25 percent returns on their capital employed and paid 20 percent of their profit as dividends.
Currently, the company stocks are trading at a discounted price— track live updates of Metropolis Healthcare share price.
Steel Strips and wheels
The company is engaged in the automobile sector, producing steel rims for automobile tires. They have long-term contracts with brands like Hyundai, Kia Motors, and Mahindra. But the nature of their business is cyclical, meaning their revenue depends on the country’s economic cycles. Because of the current economic conditions and slow growth of the automobile segment, the company shares are trading at the oversold threshold.
On the financial front, the company recorded a 22 percent growth in its annual profit in the past ten years.
Now get direct updates on Steel Strips Wheels share price.
The company operates in the housing and commercial real estate market. They have a primary presence in Bangalore, from where it generates 67 percent of its business. Despite local concentration, the company has a high chance to maintain its growth rate as the housing and commercial real estate market expands in Bengaluru.
Follow Sobha ltd share price, before starting the investing journey.
Factors to consider before investing in small-cap stocks
Here are the factors to consider while investing in small-cap stocks.
Volatility: Small-cap stocks are more volatile than large-cap shares because they are less established. Volatility is a measure of the tendency of price change over time.
Risks: Small-caps are high risk because their share price can change significantly with market trends.
Investment horizon: Since it is an equity investment, it tends to perform in the long run.
Returns: Small-cap companies can generate higher returns than large-cap stocks. But one must remember that the return is not consistent.
Cost of investment: The share prices of small-cap companies are usually lower. Hence, the cost of investing in small-cap stocks is less.
Company growth: An excellent way to evaluate a company’s potential is to assess its financial stability.
Small-cap stocks can generate significant returns. But the risk quotient of investing in small caps is also high. An alternative way to invest in small-cap stocks is to gain exposure in small cap indices. If you are planning a small-cap investment, Open a Demat Account and find numerous choices.
Disclaimer – This blog is exclusively for educational purposes. The securities quoted are exemplary and are not recommendatory.