Smallcap stocks are stocks that belong to a company with very low market capitalisation values.
Per regulatory classification, especially adopted by asset managers, these are companies ranking lower than 250 top companies ranked in descending order basis on the value of market capitalisation.
These companies are best visualised as smaller companies typically in an early stage of their lifecycle, either operating at a small scale or catering to a limited segment of a larger industry.
Nirav Karkera, Head – of Research, Fisdom says, “The biggest investment advantage offered by these smallcap companies’ shares is the opportunity to participate in the earnings growth and expansion phase of promising companies. Smaller companies are typically known to be more agile and nimble when it comes to decision-making, implementation and scaling of operations.”
He further adds, “Considering the lower base at which they operate, any increment in growth metrics lend a multifold growth in the company’s valuation. Knowing that these are very small companies with limited information on the public domain, it is also monitored by lesser analysts and market participants versus peers with larger market capitalisations.”
Such limited surveillance offers researchers an information edge that helps them capitalise on the opportunity available. However, effective synthesising and interpretation of the information is an important caveat that is easier said than done.
Karkera explains, “The small size of these companies also makes it relatively more vulnerable to shifting industry/market dynamics, macroeconomic developments or even changes in the internal environment of the company. This sensitivity is well captured by the relatively higher degree of volatility in share prices of such companies.” The relatively less explored and unexplored depths of the smallcap segment, while an opportunity, is also reflective of the difficulty in accessing critical public domain information that is critical to ascertain investibility.
While investing in small-caps offers a strong diversification and strong alpha generation potential, Karkera says, “it requires an investor to acknowledge heightened volatility as an inherent trait, be willing to wait out through longer market cycles for performance and finally be willing to outsource the stock selection to competent professionals like small-cap mutual fund managers if unable to take up intensive research and analytics on their own.”
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