Smallcap investing: What are Small Cap Stocks, Why is BSE Smallcap Index a good benchmark?

If you’ve heard about small cap stocks and are wondering what they are and how they work, we’ll talk about them in this article.

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What are Small Cap Stocks?

To understand small-caps, we need to first understand what “cap” stands for. Market Capitalization is a simple metric to measure the size of a company. Simply put, the value of all the company’s outstanding shares is its market capitalization.

[Market Capitalization = Total number of outstanding shares of the company x Current share price]

Now, in India, companies that have a market capitalization of less than ₹5,000 crore are called small-cap companies. In the US, small caps are categorised as companies with market cap between $300 million to $2 billion.

These small-cap companies are smaller in size, operations and revenues but they are not necessarily startups or new firms. Often, these could be old mature companies with great business models.

Here is a list of the best BSE small cap stocks. 

What are the Features of Small Cap Stocks?

1. Growth Potential: Because these companies are focusing on growth and might yet be to tap their entire addressable market or build the efficiency they targeted, they have significant growth potential. During market upswings, a fundamentally strong small cap stock might give better returns as compared to a large cap.
2. Liquidity: The volumes traded for small cap stocks are significantly lower than large caps. This is because the outstanding shares in circulation are lower than those of large caps. At times, it can get difficult to exit an investment due to low liquidity.
3. Risk: Due to the high volatility and a lower confidence in these businesses, weathering business cycles and challenges becomes riskier for these companies. The risk of investing in small caps is therefore also high. An extended recession could probably take a sm