Is Investing In Small-Caps A Good Idea?

By GauravSharma
27-June-2019 3:44:20 PM

Companies listed on exchanges in the stock market can be classified based on their market capitalizations. Generally, the companies with large market capitalizations are well-established, reputable companies recognized for their steady growth and uninterrupted dividend payouts while some companies are not as well-established as large-cap companies and have comparatively low market-capitalizations and clientele are mid-cap companies.

And there are companies which are at the early stage of development and have typically low revenue and the small clientele is often recognized as small-cap companies. Some of these companies have substantial growth potential but the risk of failure is also high. From an investor’s point of view, it is not easy to decide whether to invest in large-cap stocks, mid-cap stocks or small-cap stocks.

Lately, it has found that many investors seeks-out the small-cap stocks with the objective of capital appreciation through investment in such high-growth stocks. Small-cap stocks are highly volatile and sensitive to economic shifts but it is also a fact that small-cap stocks have huge potential and showed some remarkable returns in the last decade or two compared to large-cap and mid-cap stocks.

Now, the question is, “Is investing in small-cap stocks a good idea or not?”

Read Also: How to Buy Your First Stock?


When & Why Should Invest in Small-Cap Stocks?

If history has taught us anything it is that the Indian small-cap stocks have outperformed large-cap stocks during rising rate environments time-to-time. Another way to find out when should one invest in small-cap stocks is when the market has already been down for a very time and there’s a possibility for it to rise anytime sooner. However, it can be difficult to predict such time. If you have a very high-risk appetite then you can think of investing in small-cap stocks but only after the in-depth research about the company’s background and its business model.

It has been noticed that not all small-cap companies can provide substantial returns, some failed to cope with the business challenges and end-up piling massive debt. If you are planning to invest for at least 7-10 years then small-cap can be a good idea since small-cap companies are sensitive to economic shifts, they grow faster than large-cap and mid-cap stocks during the upswings of business cycles when the economy is witnessing growth. Due to this, the small-cap companies succeed to outperform the large-cap stocks, in terms of returns.

Like a small boat, the small-cap companies can take big decisions faster and move faster and precisely than the large-cap companies. The small management and fewer potential obstructions made it easy for a small-cap company to start growing again after the recession and respond to the positive environment quickly.

But, to that happens, you still need to find the right small-cap stocks or mutual funds that can generate that kind of wealth for you. You don’t wanna get yourself into investing in a small-cap stock that has delivered an on-off performance.

Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service.

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