Small Cap Stocks

• 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.

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.

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.