Small-Cap Stocks
Stocks are categorized on the basis of their market capitalization. The market capitalization of a company is a product of its share price and the outstanding number of shares. Small-Cap is a term used to refer to companies that have a relatively smaller market capitalization. Small-cap are those set of companies whose market capitalization is less than 5000 Cr. They are small-sized emerging companies that may like to grow into mid-cap or large-cap. Stock issued by these companies are known as small-cap stocks and they hold a rank above 251.
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Features:
- Volatility: Small-cap stocks are highly volatile as NAV is highly influenced by market fluctuations.
- Risk Factor: They are known as risky investments as they are prone to market recessions and takes time for recovery.
- Returns: Small-cap stocks are top-yielding investments by yielding over 100% returns.
- Cost of Investment: The investor has to pay the expense ratio (annual charge) along with the initial cost. Lower the expense ratio, better the returns.
- Investment Horizon: Small-cap stocks can be invested for a short term or long-term depending on the need for returns.
- Taxation: The returns earned on the redemption of small-cap stocks are treated as income under Section 80C. The gains thus earned are subject to short-term capital gain tax at the rate of 15%, if the holding period of shares was for less than a year. However, gains earned from shares whose holding period was over a year would attract long-term capital gain tax at the rate of 10%.
Examples:
- Hawkins Cookers
- Wockhardt
- Justdial
- Nil Kamal
- Raymond
- Birla soft
- CEAT
- GNFC
Advantages and risks associated:
Advantages:
- Small-cap companies have greater potential to grow and acquire capital in due time.
- Small investors benefit over large investors because they can avail small-cap stocks at a fair price whereas large investors have to adhere to certain limitations.
- Small-cap companies and their stocks are under-recognized and underpriced due to market inefficiencies. Investors benefit from these inefficiencies by acquiring quality stocks that are being offered at lower rates.
Risks:
- Small-cap stocks are susceptible to market risks and can be cushioned only in long term.
- They offer less liquidity to investors and making the sale process cumbersome.
- Time and research are required to determine the effectiveness as an investment avenue.
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Final thoughts:
Small-cap stocks have outperformed the broader market with the best value, fast growth, and most momentum. However, small-cap stocks include small companies and start-ups that do business at a small scale so research has to be done before investing. An investor should, therefore, always before investing should opt for investments that suit his risk appetite and financial standings.
Author: Urvi Surti
About the Author:
Urvi is a commerce graduate and has a keen interest in Finance. She has completed her Chartered Wealth Management (CWM) from the American Academy of Financial Management and is currently pursuing a career in Financial Risk Management (FRM).
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