One size doesn’t fit all! And this is especially true in the case of stock investing too. Companies of all sizes are listed on the bourses. But no two people can create the same portfolio out of these companies. This is because each person has a different risk profile. And each company carries a different degree of risk. The size of the company is determined by its market capitalisation. The market capitalisation of the company is determined by calculating the per share price by the number of outstanding shares. Simply defined, it is how much you would pay to buy every share of stock on the market. Based on market cap, these companies are broadly classified into three different groups: Large cap, Mid cap and Small cap. To know in detail about market capitalization and its different groups, click here.
You need to invest your money in the stock market based on your risk appetite and your return expectations, thus choosing stocks from amongst these different market caps.
For example, large cap stocks are considered to be relatively safe stocks. These companies have been around for a while, are stable and generally have a great track record to boast of. So if you are one those who cannot afford to risk losing any money, you need to stay invested in only the large cap stocks. If the water is choppy, would you like to be in a large boat or a small boat?
But their large size also means they probably won’t grow at a very high rate. . Does this mean that you cannot make high returns by investing in them? Definitely not! For profiting from investing in large caps you just need to pick up the right one at the right price and time!
In case you are looking for companies with higher growth and have the heart to take up a little risk, then mid cap stocks are the thing for you! However, you should be careful while investing in these. While the group can boast of quality stocks that went on to become the future large caps, it is also stained with history of stocks that have gone down the drain. In times of volatility, mid-caps are the first to be affected. These stocks are the first to be picked up when markets show signs of recovery and the first to be dumped on hints of an impending fall. And so you, Mr Investor, need to be extra careful while investing in these companies. Be sure to pick up fundamentally sound companies with a good future.
Finally, for the adventurous and aggressive ones, the market has what it calls the small cap stocks. While small caps are extremely volatile and ripe with history of companies going bankrupt; there have been some that have managed to sail right to the large caps and made investors millionaires. However, the risk that comes along with these stocks is extremely high. And while you need to be careful before investing in midcaps, you need to be doubly so before investing in a small cap.
So, where should you fish for stocks?
The question that you should answer is whether you should go fishing for stocks in a pool i.e. only large caps or an ocean i.e. across various market caps.
Large cap stocks form a large part of holding for Institutional investors, like pension funds, insurance companies and similar organizations, as they give the much needed stability to your portfolio. They are like the main course of your investment meal. Of course the dessert (small caps) is tastier and exciting, but without the main course, you cannot have a balanced and fulfilling meal! So, irrespective of your investment objective, large caps should form a large part of your portfolio. In fact, if your appetite for risk is nil or very low, your portfolio should just consist of just these mighty large caps.
But if your appetite for risk is a little high, you can invest in the mid cap stocks, provided they are fundamentally sound companies and are available at the right price.
Further, small-caps provide a terrific opportunity for sharp growth, so you might also want to invest a portion of your money in these stocks. But you need to be sure that you have the stomach to bear the high risk that these stocks entail. Most importantly, make sure you research them before jumping in.
So, can you blindly invest in any of these companies? Absolutely not! Many companies, even certain large caps are not worth putting your hard earned money into. They have not performed well in the past and may still be facing a lot of problems.
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