Stocks – Small-Cap, Mid-Cap, Large-Cap
By: Merlin Joy, Senior Financial Trainer
April 9, 2020
Small-cap stocks or otherwise called small-cap equity stocks are traded in a stock exchange where the capitalization range is below 5000 crores and is known as one of the top-yielding investment options. They usually have tremendous fluctuations over a short period of time. Investors who can withstand high-risk exposure can possibly trade in small-cap stocks. With high risk comes high returns. Mostly such stocks exhibit volatile market conditions resulting in high-risk occurrence. The risk factor is a major feature of small-cap that affects both traders and investors. Due to its dependency in market fluctuations, small-cap stocks are highly prone to get affected by market recession and takes longer to recover from it. Small-cap stocks are best suited for long term investments as it helps spread the risk and attain decent profits. Apart from the initial cost, the expense ratio has to be paid off annually by the investors, where the upper limit of it is 2.5% of the average Asset Under Management (AUM). Investors need to keep in mind that the lower the expense ratio better will be the returns. Small-cap stocks are more beneficial for small investors as the institutional investors have limitations to raise the prices. Hence the other small investors can obtain shares at a fair price. Only with proper research and market evaluation, the investor can scalp small-cap share profits. When compared with large-cap companies, small-cap has a better growth rate as it has the potential to grow in due time. In order to spread or avoid the risk, investors have to make sure that proper asset allocation and portfolio management is done.
Mid-cap having more capital than small-cap ranging between 5000 -20,000 crores and are considered to be at a lesser risk. During a market recession, they can manage not to go bankrupt, unlike small-cap stocks. Mid-cap stocks are capable of recovering faster from a recession. Depending on the stock’s growth potential, the investor needs to do proper research before investing in such stocks. Generally, it is seen that mid-cap companies reside unattractive in the stock market to the investors unless a large-cap stock decides to buy it or if the mid-cap company itself is launching a new product following up a new competitor. A mid-cap company is not as stable as a large-cap is. Also mid-cap stocks focuses on one kind of business and if that market/business breakdown so will the mid-cap company. Mid-cap companies show high productive performance in an expansion phase whereas the same turns out risky in a contraction phase indicating slight instability. On the brighter side, the growth rate is stable with low-interest rates. It’s much easier to invest in mid cap mutual funds as it is led by professionals who know the details of mid-cap stocks inside out. Any well maintained and balanced portfolio will consist of mid-cap stocks due to its stable growth rate.
Large-cap stocks are companies with a capitalization of more than 20,000 crores having much higher stability during a downturn when cambered to both small-cap and mid-cap stocks. They have the potential to withstand recessions and maintain without going bankrupt. They are well-established companies of high financial maturity. For the same reason, their returns cannot be appreciated to more than small-cap and mid-cap. You can expect moderate returns from large-cap stocks. They always have readily available buyers making the most liquid investment option among the three. The investors just have to know that their shares are more expensive than other options. The ultimate advantage of investing large-cap stocks is that it has a low-risk exposure factor because it reacts mildly towards market volatility. In addition, they showcase a regular source of income from mostly dividends. Unlike mid-cap and small-cap companies, large-cap companies in India are obligated to provide access to their financial statements and other necessary documents to the general public.
