Small-cap stocks are shares of companies with a relatively small market capitalization, typically ranging between ₹500 crores to ₹5,000 crores. These stocks play a crucial role in diversifying your stock portfolio by adding an element of growth potential. While they tend to be riskier, they can also offer higher returns, especially if the companies experience rapid growth.

What Are Small-Cap Stocks?

Small-cap stocks are the shares of companies with smaller market capitalizations compared to large-cap or mid-cap stocks. They usually have the potential for significant growth, but they also carry higher risks. Because these companies are in their early stages of development, their stock prices can be more volatile.

Why Are Small-Cap Stocks Important for Diversification?

Small-cap stocks are important for diversification because they tend to have different price movements compared to larger, more established companies. When the stock market experiences a downturn, large-cap stocks may be affected more, while small-cap stocks may perform better. Including small-cap stocks in your portfolio helps to reduce the overall risk by spreading investments across different types of companies and industries.

How Do Small-Cap Stocks Help Increase Returns?

Small-cap stocks often have high growth potential. As these companies expand, their stock prices tend to rise significantly. If you invest in these stocks at the right time, you can see substantial returns. While they are riskier than large-cap stocks, their growth potential can boost your portfolio’s overall returns over time.

What Are the Risks of Investing in Small-Cap Stocks?

The biggest risk with small-cap stocks is their volatility. These companies are often less stable and more sensitive to market changes. A downturn in the economy can cause their stock prices to fall rapidly. Moreover, small-cap companies may face challenges in securing funding, growing their business, or competing with larger companies, which can negatively impact stock prices.

How to Include Small-Cap Stocks in Your Portfolio?

To include small-cap stocks in your portfolio, consider starting with a small percentage of your total investments. This allows you to take advantage of their growth potential without taking on too much risk. It’s important to research each small-cap company carefully and consider its industry, financial health, and growth prospects before investing.

How Do Small-Cap Stocks Compare to Large-Cap and Mid-Cap Stocks?

Small-cap stocks are more volatile and have higher growth potential compared to large-cap stocks, which are typically more stable but offer lower growth. Mid-cap stocks are somewhere in between – they offer moderate growth with moderate risk. Small-cap stocks, however, can provide higher returns if the company grows rapidly, but they also carry a higher risk of loss if the company faces challenges.