{"id":12398,"date":"2023-04-12T10:07:33","date_gmt":"2023-04-12T04:37:33","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=12398"},"modified":"2023-04-12T10:42:57","modified_gmt":"2023-04-12T05:12:57","slug":"how-to-take-advantage-of-small-cap-stocks-to-make-good-profits","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/how-to-take-advantage-of-small-cap-stocks-to-make-good-profits\/","title":{"rendered":"How To Take Advantage of Small-Cap Stocks To Make Good Profits"},"content":{"rendered":"\n<p>There are numerous categories of stocks, such as large-caps, mid-caps, and small-caps, each offering its own benefits and risks. An Indian company whose market capitalization is less than Rs. 5,000 cr. is known as a small-cap company. According to <a href=\"https:\/\/www.tickertape.in\/blog\/securities-and-exchange-board-of-india-functions-powers-and-regulations-of-sebi\/\">SEBI<\/a> norms, companies ranked from the 251st position onwards in terms of market capitalization are called small-cap companies.&nbsp;<\/p>\n\n\n\n<p>Unfortunately, small-cap companies have a bad reputation for being too risky, prone to fraudulent activity, and illiquid. However, history has shown that small-cap stocks have delivered phenomenal returns to investors. Thus, &nbsp;allocating to small caps can offer a significant upside.&nbsp;<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-take-advantage-of-small-cap-stocks-to-make-good-profits\/#What-are-the-advantages-of-investing-in-small-cap-stocks\" title=\"What are the advantages of investing in small-cap stocks? &nbsp;\">What are the advantages of investing in small-cap stocks? &nbsp;<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-take-advantage-of-small-cap-stocks-to-make-good-profits\/#1-Huge-growth-potential\" title=\"1. Huge growth potential&nbsp;\">1. Huge growth potential&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-take-advantage-of-small-cap-stocks-to-make-good-profits\/#2-Not-fit-for-institutions\" title=\"2. Not fit for institutions &nbsp;\">2. Not fit for institutions &nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-take-advantage-of-small-cap-stocks-to-make-good-profits\/#3-Attractive-valuation\" title=\"3. Attractive valuation &nbsp;\">3. Attractive valuation &nbsp;<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-take-advantage-of-small-cap-stocks-to-make-good-profits\/#How-to-take-advantage-of-small-cap-stocks-to-make-good-profits\" title=\"How to take advantage of small-cap stocks to make good profits? &nbsp;\">How to take advantage of small-cap stocks to make good profits? &nbsp;<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-take-advantage-of-small-cap-stocks-to-make-good-profits\/#Identifying-the-right-businesses-with-quality-management\" title=\"Identifying the right businesses with quality management&nbsp;\">Identifying the right businesses with quality management&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-take-advantage-of-small-cap-stocks-to-make-good-profits\/#Valuation\" title=\"Valuation&nbsp;\">Valuation&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-take-advantage-of-small-cap-stocks-to-make-good-profits\/#Allocation\" title=\"Allocation&nbsp;\">Allocation&nbsp;<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.tickertape.in\/blog\/how-to-take-advantage-of-small-cap-stocks-to-make-good-profits\/#Is-it-the-right-time-to-invest\" title=\"Is it the right time to invest? &nbsp;\">Is it the right time to invest? &nbsp;<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What-are-the-advantages-of-investing-in-small-cap-stocks\"><\/span><strong>What are the advantages of investing in small-cap stocks? <\/strong><strong>&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"1-Huge-growth-potential\"><\/span><strong>1. <\/strong><strong>Huge growth potential<\/strong><strong>&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>&#8220;Everything big starts small.&#8221; Similarly, every mid-cap or large-cap company once started as a small business. Due to their smaller size, the potential for growth is immense. Adding new products or services, expanding distribution channels, sourcing capital, and reaching scale is easier for small companies.&nbsp;<\/p>\n\n\n\n<p>Small-caps are only at the beginning of their journey, and the potential upside for undertaking risks in small-cap companies is huge.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"2-Not-fit-for-institutions\"><\/span><strong>2. <\/strong><strong>Not fit for institutions <\/strong><strong>&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Large domestic and foreign institutions are bound by regulations restricting them from investing in small-cap companies. These institutions manage huge amounts of funds, and even a small 1-2% allocation of this large amount of funds could result in a complete takeover of the small companies. Hence, small-cap companies remain unidentified and un-researched, giving an early-mover advantage to people who identify and <a href=\"https:\/\/www.tickertape.in\/blog\/why-should-you-prioritise-investing\/\">invest<\/a> in such stocks early.&nbsp;<\/p>\n\n\n\n<p>This also provides an opportunity to avail small-cap companies at a cheap valuation, which institutions do not influence. Later, when the growth potential is executed and the scale of operations becomes large, these institutions allocate funds, pushing the prices upwards, which in turn makes such small-cap companies multi-bagger stocks.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"3-Attractive-valuation\"><\/span><strong>3. <\/strong><strong>Attractive valuation <\/strong><strong>&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Small-cap companies are far more volatile than large-cap companies. During market lows, many good quality small-cap companies trade at attractive valuations due to illiquidity. During the COVID-19 pandemic and the Russia-Ukraine war, many small-cap stocks were available at attractive valuations. Small caps are typically more immune to global economic turbulence compared to large caps.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How-to-take-advantage-of-small-cap-stocks-to-make-good-profits\"><\/span><strong>How to take advantage of small-cap stocks to make good profits? <\/strong><strong>&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Identifying-the-right-businesses-with-quality-management\"><\/span><strong>Identifying the right businesses with quality management<\/strong><strong>&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Small caps tend to perform best and have indeed outperformed large caps when the economic cycle enters a recovery phase. Hence, identifying the right company beforehand helps generate good profits when the odds are in favor. &nbsp;<\/p>\n\n\n\n<p>One needs to continuously research and identify the growth opportunities in small companies due to economic cycle revival, any sectorial tailwind, product developments at the company level, <a href=\"https:\/\/www.tickertape.in\/blog\/most-undervalued-stocks-in-india\/\">undervalued stocks<\/a>, and more.&nbsp;<\/p>\n\n\n\n<p>The risks involved with small-cap companies are huge, leaving no room for error. Even a small management error can spell doom. Hence, one should conduct a thorough background check of the company&#8217;s promoters and management before investing.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Valuation\"><\/span><strong>Valuation<\/strong><strong>&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>&#8220;Quality comes at a price.&#8221; Hence, everything that looks reasonable might need to be of better quality. For superior returns, &nbsp;quality small caps are necessary.&nbsp;<\/p>\n\n\n\n<p>In investing, the price at which you buy becomes more important than what you buy. Hence, one needs to ensure not to overpay for stocks despite their strong business model and growth potential.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Allocation\"><\/span><strong>Allocation<\/strong><strong>&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Since small-cap companies are risky, one must include small-caps and large-caps based on their risk appetite and balance the overall portfolio. Even among small-caps, one can choose multiple companies and diversify the portfolio to reduce risk.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Is-it-the-right-time-to-invest\"><\/span><strong>Is it the right time to invest? <\/strong><strong>&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>There is no way to predict good entry and exit times in the <a href=\"https:\/\/www.tickertape.in\/blog\/how-to-invest-in-shares\/\">stock market<\/a> with absolute accuracy, but history suggests there cannot be any better time than now to invest in small-cap companies.&nbsp;<\/p>\n\n\n\n<p><a href=\"https:\/\/www.tickertape.in\/market-mood-index?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=arvindkothari\" target=\"_blank\" data-type=\"URL\" data-id=\"https:\/\/www.tickertape.in\/market-mood-index?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=arvindkothari\" rel=\"noreferrer noopener\">Tickertape\u2019s Market Mood Index (MMI)<\/a> feature also helps you time your investments better. It is rigorously tested and has an accuracy of 88.6%. You can download the historical data of <a href=\"https:\/\/www.tickertape.in\/blog\/how-mmi-can-help-in-timing-your-investments-better\/\">MMI<\/a> using <a href=\"https:\/\/www.tickertape.in\/pricing?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=arvindkothari\" target=\"_blank\" data-type=\"URL\" data-id=\"https:\/\/www.tickertape.in\/pricing?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=arvindkothari\" rel=\"noreferrer noopener\">Tickertape Pro<\/a>.&nbsp;&nbsp;<\/p>\n\n\n\n<p>In the last 500 days, both the BSE Small Cap and <a href=\"https:\/\/www.tickertape.in\/indices\/nifty-50-index-.NSEI?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=arvindkothari\" target=\"_blank\" data-type=\"URL\" data-id=\"https:\/\/www.tickertape.in\/indices\/nifty-50-index-.NSEI?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=arvindkothari\" rel=\"noreferrer noopener\">NIFTY 50<\/a> indices experienced negative returns of -4.92% and -4.63%,\u00a0 respectively, indicating a challenging period of 1.5 yrs for the market, with a significant number of fund managers underperforming.\u00a0\u00a0<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"386\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2023\/04\/Screenshot-2023-04-12-at-10.41.58-AM-1024x386.png\" alt=\"\" class=\"wp-image-12408\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2023\/04\/Screenshot-2023-04-12-at-10.41.58-AM-1024x386.png 1024w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2023\/04\/Screenshot-2023-04-12-at-10.41.58-AM-300x113.png 300w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2023\/04\/Screenshot-2023-04-12-at-10.41.58-AM-1536x579.png 1536w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p><a href=\"https:\/\/www.tickertape.in\/blog\/technical-analysis-of-stocks\/\">Technical analysis<\/a> also suggests that the market indices have remained relatively stagnant over the past 18 months,&nbsp; indicating a high probability of an upward move in the near future.&nbsp;<\/p>\n\n\n\n<p>Tickertape provides <a href=\"https:\/\/www.tickertape.in\/screener\/equity?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=arvindkothari\" target=\"_blank\" data-type=\"URL\" data-id=\"https:\/\/www.tickertape.in\/screener\/equity?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=arvindkothari\" rel=\"noreferrer noopener\">Stock Screener<\/a> where you can filter \u201csmall-cap\u201d companies with additional <a href=\"https:\/\/www.tickertape.in\/blog\/14-new-filters-on-tickertape-stock-screener\/\">filters<\/a> of Sector and PE ratio. This feature provides a big help in identifying the right businesses at the right valuation. Thus, identifying the right small-cap company and allocating it at reasonable prices before institutions enter will result in good profits.<\/p>\n\n\n\n<p><br>This article was written by Arvind Kothari. He has been practising <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/\">Equity<\/a> Research and Investment Advisory for the last 12 yrs and has previously worked with ICICI Bank as an Industry Research Analyst. He then founded <a href=\"https:\/\/niveshaay.smallcase.com\/?utm_source=blog&amp;utm_medium=gart&amp;utm_campaign=arvindkothari\" target=\"_blank\" rel=\"noreferrer noopener nofollow\">Niveshaay Investment Advisors<\/a>, a SEBI Registered Investment Advisory Firm.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Read our expert explain about the advantages of small-cap stocks and how to make profits using them.<\/p>\n","protected":false},"author":59,"featured_media":12401,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[1770],"tags":[],"acf":[],"modified_by":null,"jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2023\/04\/10-Apr-2023-How-To-Take-Advantage-of-Small-Cap-Stocks-To-Make-Good-Profits-Guest.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/12398"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/59"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=12398"}],"version-history":[{"count":7,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/12398\/revisions"}],"predecessor-version":[{"id":12411,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/12398\/revisions\/12411"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/12401"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=12398"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=12398"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=12398"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}