The potential for growth in stocks in small caps is high.
They carry high returns as well as high risk.
It is important to do fundamental analysis before investing in shares of small cap companies.
Mumbai. You must have often heard about large cap, mid cap and small cap companies regarding investing in the stock market. The market capitalization of these companies divided on the basis of cap varies. Companies whose market capitalization is less than Rs 5000 crore are called small cap companies. Many investors turn to smallcap companies for investment in the market, because they have more potential for growth and later these companies join the midcap or large cap category.
However, smallcap companies, where they have the potential to deliver returns, also carry high risk.
If things don’t go well then big losses can also be incurred. Therefore, some things should be kept in mind before investing in the shares of small cap category companies.
High risk, high return potential
Every company starts from the bottom and reaches the heights but for this it is necessary that the company’s vision, business model, future prospects about that business and experience of the promoters matter and for all these things the fundamentals of the company matter. . Therefore it is very important to do fundamental analysis before investing in small cap companies.
Also read- What is Technical and Fundamental Analysis? This knowledge is necessary to earn money in the stock market, know how to learn it
- Check the fundamentals of every smallcap you are looking at, that is, study the financial position of the company. Do have a look at the profit and growth of the company in the last 5 years. Try to know how much the company’s profit has increased year after year and how much the company has benefited the investors from its growth.
- Look at the company’s P/E Ratio and P/B Ratio. If the value to price earning ratio is low, it means that it has a lot of room for growth. On the other hand, if the price to book value ratio is low, it means that the stock is undervalued.
- Also study the assets and liabilities of small cap companies under fundamental analysis.
From this the net value of the company is extracted and on the basis of this the share price is estimated. Also check dividend history.
Small-cap funds are also a good investment option
Since small companies have a lot of potential to grow and grow. Therefore, along with common investors, mutual fund houses also bet on the shares of these companies for better returns. That’s why fund houses offer small-cap mutual funds. Many fund houses in the market have launched small-cap funds by investing in which double digit returns can be achieved in a short period of time.
Benefits of investing in small cap companies
- Small cap funds have high growth potential even if invested in the bullish phase.
- Shares of small cap companies have lower valuations as compared to midcap and largecap stocks.
- In the ongoing boom in the market, many small cap stocks can prove to be better performers than mid cap and large cap stocks.
- Since the shares of small-cap companies carry high returns as well as high risk, so after buying the stock, keep an eye on your investments.
- One should invest in small-cap stocks when the market is weak.
Tags: business news, multibagger stocks, stock market
FIRST PUBLISHED : November 13, 2022, 11:47 IST