CHART OF THE WEEK 📈
What Are Small Caps?
According to SEBI rules, small cap stocks begin from the 251st position in terms of market capitalization. Although these businesses are smaller in size, it is expected that they will grow substantially and offer investors outsized returns.
Yet, due to their lack of resources in comparison to their mid and large cap peers, they are more susceptible to a bear market or unfavourable economic conditions.
What Is Happening?
The Nifty Small cap 250 (comprising of the 251st to 500th company from the Nifty 500) is down 12%, while the Nifty 50, which consists of the top 50 companies on the Nifty index is down merely 3% since the beginning of the year.
Smallcap stocks have lagged behind their larger-cap peers as a result of the severe stock market correction.
Why Is It Happening?
In times of uncertainty, investors tend to gravitate toward safer assets. Hence, a significant amount of capital has shifted away from small caps to the bond market and blue-chip stocks (shares of very large and well-recognised companies with a long history of sound financial performance).
Small caps, because of their size usually bear the brunt of financial downturns much more compared to their larger peers. Their ability to wade off pricing pressure, strike better deals with suppliers, manage costs with minimal impact on financials, and maintain strong working capital metrics is relatively lower.
Earnings growth and valuations both tend to take a larger hit for small caps compared to large caps, resulting in larger depreciation of stock prices.
However, if your risk appetite allows it, getting into small caps gradually at large dips would prove to be very fruitful in the long run.