Small Cap Stocks

The NIFTY Small Cap 100 Index represents about 3.3% of the free-float market capitalisation of the stocks listed on the NSE as on March 29, 2019.

• Growth Potential: In comparison to larger companies, small cap firms have a higher potential for growth. This makes them an attractive option for investors with high risk appetite.
• Taking advantage of inefficiencies in the market: Analysts/institutional investors pay little attention to small cap companies, owing to the very low liquidity. Thus there is a high probability of mispricing in these stocks. This allows retail investors to use the inefficiencies of market pricing and earn a greater return on their investment.

Based on the past 5 year sales growth, the best small cap stocks in India are:

It does, however, warrant extra caution (like a higher margin of safety) due to the higher risk you take by investing in small cap companies.

• Unsteady Business model: Small cap companies are relatively newer entrant in the industry which means the business is unsteady and relies on a lot of external factors. Eg. An economic downturn for a company with high debt can pave the way for bankruptcy
• Access to new capital: The above factors also mean difficult access to capital, leading to higher interest payments.
• Low Liquidity: Small cap stocks are less liquid than their larger counterparts. This means negligible institutional presence, less research, etc.

That said, small-cap stocks in India can also give you lucrative returns. So, if you do decide to invest in the stocks of small-cap companies, make sure to do your due research about the company before making your investment. You should also diversify your investments to reduce risk.