By Jamie Dawson
Investing in stocks gives individuals the opportunity to participate in the growth potential of various companies across different sectors. According to the size of a public company’s market share, stocks are classified into three categories: small-cap, mid-cap, and large-cap.
As the name suggests, small-cap stocks are shares of relatively small companies with market capitalizations. As an investor or beginner in learning the stock market, it is essential to understand the small-cap stocks, their features, and how they differ from the other two categories.
What are Small-Cap Stocks?
Small-cap stocks are shares from small companies that are publicly traded on the stock exchanges. It is crucial for you to understand the meaning of small-cap stocks and the risks involved before investing.
Small-cap companies have a market capitalization of less than ₹5,000 crores. These companies are relatively smaller in size but have significant growth potential. However, investing in small-cap stocks carries risks due to the low probability of their success over time, making their stocks volatile.
Small Cap Stocks Features
- Investment Horizon: You can invest in small-cap stocks for both short-term and long-term goals. However, opting for a long investment horizon helps spread the associated risks and maximizes the potential for substantial returns.
- Returns: Despite the risks, small-cap stocks have the potential to offer high returns. They’re often considered top-yielding investment options with the possibility of generating higher returns.
- Risk Factor: Small-cap stocks are heavily influenced by market conditions, which means they’re more vulnerable to market fluctuations. During recessions, they may take longer to recover, exposing you to higher levels of risk.
- Cost of Investment: When considering investing in small-cap stocks, remember to factor in not only the initial cost but also ongoing expenses like the Expense Ratio. Keeping this ratio low can lead to better overall returns.
- Volatility: Small-cap stocks’ market price can fluctuate significantly due to market changes. They may perform well when the market is booming but could struggle during downturns.
- Taxation: It is important to note that returns from small-cap stock redemptions are treated as income under the Income Tax Act. Short-term gains (for shares held less than a year) are taxed at a rate of 15%, while long-term gains (for shares held over a year) are taxed at a lower rate of 10%.
Difference between Small Cap, Mid-Cap, and Large-Cap Stocks
| Feature | Small Cap Stocks | Mid-Cap Stocks | Large-Cap Stocks |
| Market Capitalization | The market cap is below ₹5,000 crores | Market cap between ₹5,000 crores and ₹20,000 crores | Market cap above ₹20,000 crores |
| Growth Potential | High growth potential with higher risk | Moderate growth potential with moderate risk | Lower growth potential with lower risk |
| Volatility | Highly volatile due to smaller size and scale | Moderately volatile compared to small caps | Relatively stable due to established size |
| Performance | Often outperform in bull markets | Perform decently in both bull and bear markets | Tend to provide stability, especially in bear markets |
| Liquidity | Lower liquidity may have higher bid-ask spreads | Better liquidity than small-caps | High liquidity, usually easy to buy and sell |
| Risk | Higher risk due to the potential for greater price fluctuations | Moderate risk compared to small caps | Lower risk due to established market presence |
| Company Size | Smaller companies with limited resources | Medium-sized companies with established operations | Large, well-established companies with significant resources |
Conclusion
Knowing small-cap stocks and their distinguishing features is crucial for investors engaging their funds in the stock market. Seeking advice from reputable SEBI-registered investment advisory services can also help you make informed decisions and achieve your financial objectives in the dynamic world of stock trading. Investors should also keep an eye on market trends and economic indicators when considering small-cap stocks. Factors such as interest rates, inflation, and overall market sentiment can impact the performance of small-cap stocks.
Reference Links:
https://www.kotaksecurities.com/share-market/difference-between-large-small-mid-cap-in-share-market/
https://www.nirmalbang.com/knowledge-center/difference-between-large-mid-small-cap-stocks.html
https://www.livemint.com/market/bse-small-cap-stocks
https://www.investopedia.com/terms/s/small-cap.asp
https://groww.in/p/small-cap-stocks
https://time.com/personal-finance/article/what-are-small-cap-stocks/
