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The BIG Story of Small-Cap Stocks – What Does 2020 Have in Store?
Around the world, market capitalization is one of the biggest parameters in selecting a stock. As a young investor, I remember my elders talking about blue-chip shares – the safest way to invest in stocks. Here is a thing about stock investors – while most of them understand that investing in the stock market carries risks, they do their best to select the least risky stocks.
I am not saying that this is a bad ploy, but if you are unwilling to take risks in the stock market, then chances are, that you are missing out on some great earning opportunities too. Imagine investing in a small company that grows to become the next Amazon in five years. The growth that you can experience will be phenomenal. Is it risky? Yes. But, that’s what stock investing is about, right? Today, I will talk about small-cap stocks and try to take a little peek into what 2020 can have in store for them.
Let’s start with understanding small-cap stocks.
What are Small-Cap Stocks?
In order to understand small-caps, we need to understand the term “cap” or “market capitalization”.
Market capitalization, in simple terms, means the total value of the outstanding shares of a company. It is calculated by multiplying the total number of outstanding shares by their current market price. Therefore, Market Capitalization = Number of Outstanding Shares * Current Market Price
In India, companies are broadly classified into three categories based on their market capitalization:
SEBI defines large, mid, and small-caps as follows:
- Large-Cap: 1st – 100th company in terms of full market capitalization
- Mid-Cap: 101st – 250th company in terms of full market capitalization
- Small-Cap: 251st company onwards in terms of full market capitalization
To give you an idea, companies with a market capitalization of INR 10,000 crore and above are considered large-cap companies, capitalization between INR 500 crore and INR 10,000 crore are mid-cap companies, and those below INR 500 crore are small-cap companies.
Small-cap stocks are considered to be riskier than their mid-cap and large-cap counterparts. But, investing in small-cap stocks isn’t just about picking an underdog and hoping that it wins. Before we go ahead, here is a quick look at the pros and cons of investing in small-cap stocks:
Small-Caps – The India Story
The Small-cap market in India has been an intriguing space for market watchers like me. Over the last decade, 2014 saw the small-cap segment offering as high as 71% returns. This was repeated in 2017 with returns as high as 61%! However, the intervening years saw them dive deep too – so much about the volatility of these stocks. In fact, the index broke all records in January 2018 and has been correcting ever since. Here is a quick look at the performance of Nifty Small-Cap 50 Index over the last 10 years:
As you can see above, the small-cap segment has seen a lot of volatility over the last decade. While the period between 2011 and 2013 was bad for this segment, it laid the foundation for a revival of the economy and subsequent growth of the index over the next 5 years until it reached a new peak in 2018. In the Indian economy, small-cap stocks have proven to offer opportunities to investors when the economy is reviving from a setback.
Having said that, it is also important to remember that these stocks find it difficult to weather economic storms as they don’t have the wherewithal to brave a slowing business scenario. Post its peak in 2018, the small-cap segment has experienced a downturn losing around 35%.
This begs an interesting question –
What does 2020 have in store for small-caps?
Most investors who were around during the 2011-2013 period would recall that the end of this period had revealed a great investment opportunity in small-caps. While the factors driving small-cap companies in the following years were different, many investors are expecting a similar (if not same) turn of events in 2020 too.
The last two years have been difficult for all kinds of companies around the globe. Think about the trade war between China and the US or other geopolitical developments. This has damaged the small-cap segment the most since they have a lesser chance to survive such global storms. But, if I turn the pages of history, then I am convinced that this is also a good time to invest in small-caps. We know that markets had reached a new peak in 2018 and have been correcting since then. If we keep an investment horizon of 5+ years, dedicate around 5-10% of our portfolio to well-researched small-cap stocks, and withstand the volatility that comes with the domain, then we might have a chance to earn handsome returns.
My point is simple – a growing economy is good for small businesses but it’s not without ups and downs. Hence, as an investor, if you can withstand the volatility and keep an investment window of 5+ years open, then you must consider small-cap stocks.
This brings me to the last question.
How does one choose a good small-cap stock?
While there are many ways to select a good small-cap stock, today I am going to introduce you to a new product that I have been invested in for the last 6 months – the India Small-Cap Kristal. Kristal.ai leverages algorithms that are powered by artificial intelligence along with human skills to offer a variety of investment baskets to people.
The India Small-Cap Kristal allows investors to gain access to the best performing small-cap stocks in the market. It focuses on companies that show great potential for growth and help you generate wealth over the longer term. While the returns have been in accordance with the markets, I am optimistic about the small-cap segment and Team Kristal’s selection of the best stocks. Also, despite being a seasoned investor, I find investing in small-cap stocks directly to be an overwhelming experience. Hence, a stock basket like the one offered by India Small-Cap Kristal is just what the doctor ordered. ☺</p?>
The way I see it, 2020 does seem like a good year to start considering inclusion (or re-inclusion) of small-cap stocks in your investment portfolio. I don’t need to mention that these stocks can be highly volatile and carry higher risks, but the rewards can be beyond expectations too. As an investor, you need to create a strategy to include small-cap stocks in your portfolio and ensure that you keep the exposure to these volatile beasts to the minimum.
Remember, there is no formula for success in investing in stock markets. You need to research well, create a robust investment plan, and seek the advice of a professional investment advisor (if needed) to ensure that your investments get you closer to your financial goals. The small-cap segment, if invested at the right time and for the right tenure, has the capability of generating wealth faster than large-cap stocks.
The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.
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