Article

Small Cap Stock
June 07 , 2012

The size of a company is defined by its market cap (number of outstanding shares * share price). We define a company having a market cap below Rs.1000 crore as a small cap company. Few mutual funds concentrate exclusively in this space, due to the reasons of risk and liquidity mentioned below.

A small cap stock usually has certain features:

  • It suffers from low liquidity due to thin volumes being traded on a day-to-day basis. Thus, it is usually avoided by institutional investors
  • It is sometimes held for its 'multi-bagger' potential. The idea is that since research coverage in these stocks are less, individual investors may find it easier to identify gems or undervalued companies in this space than in the larger stocks

Overall, small caps carry higher risk than mid caps and large caps. But they can give multi-bagger returns if identified correctly.

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