Thanks to Hollywood, everyone knows that there’s tons of money to be made in the stock market, but nobody tells you how to do it. If you’re also thinking of making a move and trying your luck in the stock market, we’d first advise you to figure out the basics, like how the stock market works and how you can make money even with little capital.
In this post, we’d talk about what’s market cap and why it’s good to invest in nifty small cap companies.
Introduction to market capitalization
Hoping that this is the first time you’re considering investing in stocks, you may have tons of questions plaguing your mind about which stocks to invest in and which to avoid. In fact, such questions can sometimes even overwhelm a seasoned investor.
Stock market investors have years of experience in figuring out the right choice for their investment, and you must also determine the same. However, that’s easier said than done.
When we talk about classification on the basis of market capitalization, the term’ market capitalization’ means the number of outstanding shares of a company in the market multiplied by the current price of shares. This helps us find the estimated valuation of a company.
To break it down even further, suppose an ABC company in nifty mid cap has 10,000 outstanding shares in the market, and each share is priced at INR 20. In such a case, the market capitalization of Company ABC will be (10,000 x 20) = INR 2,00,000.
Difference between large cap, mid cap, and small cap stocks
The stock market is classified on the basis of market capitalization. These classifications are known as large cap, mid cap, and small cap. This helps investors (even new investors like yourself) in making informed decisions.
Large cap companies are businesses that are well-established and have a significant market share. This can be above and beyond INR 20,000 and more. Such companies dominate the industry and can hold themselves well in times of recession. They are less volatile, but at the same time, returns here can be relatively low.
Mid cap companies have a market cap between INR 5,000 and INR 20,000. Investing in such companies can be a bit risky as they are a little volatile but also offer higher growth potential than large cap stocks.
Nifty small cap companies are those with a market capitalization of less than INR 5,000. Such companies are smaller in size but have significant growth potential. That said, such stocks are quite volatile and usually have a long history of underperformance. However, when the economy is recovering from a recession, small cap stocks often outperform other stocks.
What is the nifty small cap 100?
As the name implies, the nifty small cap 100 is crafted to reflect the behavior and performance of the small cap segment. It includes 100 tradable and exchange-listed companies.
It is worth mentioning that over the last year or so, nifty small cap index funds have literally outperformed nifty mid cap index funds, as well as the nifty 50 index funds. If we look at the performance of the same over a period of 3 years, they once again dominated the market and significantly outperformed the nifty 50 index funds and nifty mid cap index funds.
Why should you invest in nifty small cap stocks?
When it comes to investments, most people will tell you not to invest in them. Why? Well, that’s because the media usually focuses on the negative aspect of the nifty mid cap and small cap stocks – that they’re risky. Others are usually of the opinion that small cap funds usually work in a bull market. However, all there’s more to it than meets the eye, and investing in Nifty small cap 100 may indeed be a good move.
Before we dive into small cap companies, you must first understand that there are 5000 small cap companies in total, and not all of these are good for investments. This is where the Nifty small cap 100 stocks come in. You can go one-step further and choose 30-40 small caps of your own, after all active fund management is an active skill.
It is worth mentioning that the nifty small cap 100 index was at the 6000 mark in 2008. The same stands at 5700 now. While you may think that the index has remained relatively flat over the last 13 years, it couldn’t be further from the truth.
Between 2004 and 2007, the small cap index grew by 500%, but in 2008, it fell by 72% and nearly 80% of the gains made between 2004 and 2007 got wiped off.
The index again showed positive signs between 2009 – 2017, where it grew by over 400%. However, in 2018, small caps had a correction, and again almost 40% in value was lost.
So, it’s needless to say that the nifty small cap stocks take a meandering course spread over many years and offer some strong periods of substantial wealth appreciation. Thus, if you can do your research well and make use of some active fund management, you can get annualized returns often crossing 20%.
Key takeaway
If you want to know whether or not there’s money to be made with nifty small cap stocks, our answer is simple – yes, tons! However, in terms of volatility, there’s also a significant risk of losing money. That’s because small cap funds tend to rise and fall sharply. So, if you’re looking to make money on a long term, we would advise you to invest in small cap funds only when the time is right. Once again, you’d need your active fund management skills to help you make the right decision.
Nifty small cap stocks do particularly well in bull runs. In short, the valuations of small caps sky-rocket during rising markets, so time your entry into the market well, and you may well be in for a treat. Small cap funds have periods of massive gains and massive falls, so always proceed cautiously.