Small-cap stocks are the shares of companies with a relatively low market capitalization. Before discussing the small-cap stocks in detail, let us first understand the meaning of market capitalization.
Market capitalization is an aggregate value of the company. It is derived by multiplying the total number of shares with the current market price of the share. The resulting amount determines the classification of the stocks as small, mid or large cap stocks.
Small-cap stocks are generally the ones whose market capitalization is upto Rs2,000cr, and these companies are listed under the small-cap stock holding companies in the securities market.
It is a common belief that investing in small-cap stocks is risky, and the investors with a high risk appetite should invest in such stocks. However, it should be noted, that most of the big companies start as a small-caps before becoming significant players.
Why should you invest in small-cap stocks?
It is a proven fact that small-cap stocks have outperformed the large-cap stocks in the past. Even during market volatility, small-cap stocks have withstood the test of market conditions. Small-cap stocks often have the ability to outperform the market as they tend to be aggressive players and explore new opportunities to stabilize their situation.
Small-cap stocks have utmost growth potential, and these companies come up with innovative business strategies. A lot of large-cap companies plan and act with great caution. However, companies which are in the embryonic stage, do not hesitate in taking risks. Small-cap companies’ growth is measured on the basis of innovation.
One of the benefits of investing in small-cap stocks is that these stocks provide high returns coupled with volatility. An investor gets the advantage of getting a front seat in the vehicle before the big buyers swoop in for the prize. If a particular small-cap stock goes skyrocketing, an investor has much room for huge returns in the future.
Lack of coverage:
Most of the analysts and market experts have their eyes on large-cap stocks. Small-cap stocks do not catch the eye of an analyst very easily. A lot of small-cap stocks have high growth potential and are waiting for the right catalysts to ignite them. This lack of coverage is a tremendous opportunity for investors who are willing to stay invested in the long run.
Despite the general impression that investing in small-cap stocks is a risky affair, the benefits from such stocks are far more satisfying.