Small Cap Stocks
One of the ways by which people classify a big cap and a small cap stock is on the basis of the market capitalisation. A small cap stock has a market capitalisation of Rs.5000 crores.
These are young companies which have high market prospects and they are growing really fast. Small cap companies outperform big cap companies; but the investment in these companies is risky as they tend to get influenced by the volatility in the market. The word cap is a short form for capitalization. The market capitalization is calculated by multiplying the current market price of the stock to the number of shares outstanding.
Small cap companies are characterised by
Highly Volatile and risky investments
The small cap companies are highly volatile as any market turmoil tends to affect them. These companies tend to do well when the markets are bullish and tend to lose value when the markets become bearish. Since these companies are new their path to recovery is slow and small turbulences upset them. This makes them a risky proposition.
Superior growth potential
These are new growing businesses which are yet to go through all the developmental stages of a fully established business. With the right kind of business environment and business policies provided by the government and the market environment these companies grow much more than any big cap companies. It is these companies which grow into mid cap companies and then slowly into big caps. Investment in these companies at the right time has great growth potential and pays well to the investors.
Usually small cap companies have a tight liquidity level as most of their cash is put into their business for rotation as working capital or fixed capital expenditure. When an investor is going through the financials of the company he finds investing in them as risky. A little turbulence might erode their capital base.
Return on Investment
The return on investment on small cap companies is high. Small caps are usually involved in the new gen business. Their new business ideas make them a very attractive option for investment. It is a good idea to stay invested with them for a long time. The return on investment is at times more than 100%. They are a lucrative option for getting good returns. Any change in sentiments of the market usually averages out over a long period. So for good return on investment over a long period the small caps are a good option.
Price of shares
Market capitalization of small cap companies is low. Since these companies are upcoming and they are less known in the market and their shares are usually undervalued. The under valuation is also a sign of market inefficiency. It is the job of an investor to look for good shares while investing in small cap companies.
Investing in small cap stocks
Large cap companies are usually highly priced and it is not convenient for small time investors to invest in them. They are at the top of the product life cycle so expecting huge returns in a short period of time would be wrong. In the right kind of market scenario the small and mid-cap companies pay higher return to the investors because their growth is much more than the big cap companies. People who want to stay invested for a longer period of time and if their risk appetite is high should go ahead and invest in small cap companies.
Large cap companies are characterised by
Big Cap Stocks
Large cap stocks are those which have a market capitalisation of over 20,000 crores. It is calculated by multiplying the price of the stock to the outstanding shares in the market. These are companies who have an established track record of many years. People can usually track down their financial record and the return on investment they have provided to their investors for many years. These are companies which do not get really affected by the movements in the stock market. They enjoy a good reputation in the market and the investors look forward to purchasing their shares and like to stay invested with them as they provide steady return to their investors.
Return on Investment
The large or big cap companies are mature as they have been in business for many years. They do not provide exorbitant returns however they give steady returns and they have been doing so for many years. There is a financial maturity which is attained by these companies as they have been in business for years.
Compared to the mid cap and the small cap companies a big cap investment is safer and more stable in all respects. There is a kind of resilience the company attains against the turbulent forces in the market. The market of a big cap company is diversified so there is always some area which is safe and risk free for them. This is not so in case of small cap companies, the risk is high as the diversification factor does not come into play for them.
Share Price and Liquidity
The big cap companies are usually highly priced. However, due to the stability of the company and the consistent return people like to place their savings with the shares of reputable big cap companies. When the share price goes high, to make the shares more affordable for people the shares are split into two which brings down the price of one single share. This decreases the share value of one single share and increases liquidity of the company and the overall affording capacity of the shareholders to buy more shares. The volume of trade in a big cap is high so the liquidity level of big caps is also high.
Investing in Big Cap stocks
There are many investors who are not really watchful with their stock market investments. They are usually not updated with the different kinds of turbulence which hit the stocks and the kind of impact it has on them. Such investors are usually the long term investors who take stock of their investments after long periods of time. They are interested in long term growth in their portfolio, rather than look at them on a day to day basis looking for entry and exit options. So if you are one of those who is looking for long term goals to be achieved through the investments then big cap investment is for you.
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