What are Small-Cap Stock and its advantages and disadvantages
In India, Companies with a market capitalisation less than Rs. 500 Crore is considered as small-cap companies. Over 95% of Indian companies are categorised as small-caps. This type of companies are ranked above 251 and tends to perform during the initial phase of economic recovery. The stocks issued by such companies are termed as small-cap stocks. Small-cap equity is stocks of small-cap companies that are publicly traded in a stock exchange.
Investors, who wish to generate higher returns from their investments choose small-cap stocks a suitable option for them. Moreover, investors who have a high-risk tolerance level and have the willingness to expose to market risks may consider this investment option.
These stocks have high volatility and are prone to market risks when the market conditions are not favourable. However, investors can vanish the risk factor associated with small-cap stocks by adding market-friendly investments in their portfolio.
VST Industries Ltd, Bajaj Electricals Ltd, Sterlite Technologies Ltd, Can Fin Homes Ltd, Ratnamani Metals & Tubes Ltd, FDC Ltd and Godfrey Phillips India Ltd are some of the well-performing small companies in India.
Features of Small-Cap Stocks
Volatility: small-cap stocks are highly influenced by market fluctuations which make them volatile in nature.
Risk factor: These stocks are more prone to market fluctuations. They underperform when the market goes through a recession and recover from the same very slowly. This makes small-cap stocks a risky investment option.
High Returns: Small-cap shares are considered as a top-yielding investments option. They perform well during the high market phase and yield high returns.
Cost of Investment: Besides the initial cost of acquiring small-cap shares, investors also have to pay an annual charge called the Expense Ratio. The upper limit of the same is 2.5% of the average of AUM. Investors who invest in small-cap stocks with the lowest Expense Ratio would generate better returns from them.
Investment Horizon: Investors can invest in small-cap stocks in India for long-term as well as short-term.
Advantages of Small-Cap Stock
Greater growth potential
Compared to large-cap companies, small-cap companies have better growth rate compared to large-cap companies, small-cap companies tend to have a better organic growth rate.
Stocks of small-cap companies are fairly priced. This makes small-cap stocks an attractive option for small investors.
Low priced quality stocks
Small-cap companies are under-recognised and their stocks are under-priced. Investors can benefit from such inefficiencies by acquiring quality stocks that are being offered at a lower price.
Disadvantages of Small-Cap Stocks
- These stocks are susceptible to market risks which can only be cushioned in the long-term through proper asset allocation and portfolio balancing.
- It offers comparatively less liquidity to the investors and makes the process of sale cumbersome.
- Time and research are required to determine their effectiveness as an investment avenue.