What are Small Cap Stocks

 

What are Small Cap Stocks

The term “cap” is stands for capitalization. Hence, small cap is a public company who has total market value or market capitalization in between of $300million to $2billion or companies whose market capitalization is less than Rs.500 Crore. Mostly 95% of Indian companies are small-caps.

Small Cap companies holds a rank above 251 and tends to perform during the initial phase of economic recovery and the stocks issued by the small cap companies are known as Small-cap stocks.

Investors, who want to get higher return by investment will find small-cap stocks a suitable option for them. Small-cap stocks are volatile in nature and prone to market risks when the market risks when the market is going through a critical phase.

Features of Small-Cap Stocks

Some of the silent features of the small-cap stocks are mentioned below.
1. Growth Factor- The small-cap stocks have the higher potential rate of growth and hence, the possibility of giving higher returns to the investors. Such stocks provide the wealth generation opportunity, that makes them an attractive investment avenue.

2. High Volatility- Small-cap stocks are tend to be influenced by the market fluctuations, making them highly volatile in nature. For example, these small stocks perform well during the high market but tend to underperform when the market is in range.

3. Liquidity- Small-cap stocks are less liquid among the large, medium companies due to their less trading in the stock market. As they are not easily recognizable and thus not bought and sold easily. Therefore, small caps are not suitable for short term investments.

4. Cost of Investment- Besides the initial cost to pay for small caps, investors also have to pay an annual charge called the Expense Ratio.

5. Risk factor- small cap stocks are more prone to be affected by the market recession and take time to recover from the same situation hence, these stocks are highly risky.

Reasons to invest in Small Cap Stocks

There are some of the reasons why an investor needs to invest in small-cap stocks.
• Provide benefit form the potential growth
• Quality stocks are available at lower price
• Small caps shares are available at fair prices which are not affected by large financial institutions.
• Investors who have patience can trade for a long-term.

If you do not have an account and wish to open one, kindly visit the following links.

To open your account with Zerodha


To open your account with Angel Broking


To open your account with Alice Blue



Also read: How to Become a Registered Investment Advisor


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