Are you investing in the stock market? Which stocks should one start with, large and known companies (large-cap stocks) or smaller companies (small-cap stocks)?
Let’s take a look at each.
What’s good about investing in smaller companies?
Smaller companies tend to be more nimble, innovative and capital light than their larger counterparts. They have higher growth potential because of their low base. For example, it’s easier for a company to double its size from Rs.10 crore than for a company to double its size from Rs.10000 crore.
There are sheer number of investing opportunities that promotes small cap stocks. For example S&P 500 Index, which is for large cap stocks, has 500 companies whereas Russell 2000 Index has 2000 securities. This is appealing from the perspective of diversification. Moreover, due to less efficient market of small cap stocks, investors get the opportunity to go in, buy undervalued stocks and profit from potential valuation expansion later on.
What’s bad about investing in smaller companies?
Prices tend to be more volatile as fewer shares are available in the market. When the broader market is falling, the share prices can fall faster too because there are few buyers. Also, when the market is falling, people look for safety and tend to avoid smaller companies.
In the event of an economic or business downturn, many small-cap companies are not able to survive among their more competent larger counterparts, and as a result, the value of an investment in small-cap funds can drastically fall. Therefore, they are not a suitable investment for risk-averse investors. Finally, tracking small companies may also be difficult because not many research reports are available online.
What’s good about investing in large companies?
The large companies provide revenue to investors by way of dividend, which if reinvested by them would lead to a compounding effect on the overall return, achieved. Moreover, large companies are stable and impactful. It is because large cap stocks are typically blue chip companies at peak business cycle phases, generating established and stable revenue and earnings.
They tend to move with the market economy because of their size. They are also market leaders. They produce innovative solutions often with global market operations, and market news about these companies is typically impactful to the broad market overall. Not only this, large companies are widely owned plus easy to track. As India is developing, many large companies are growing fast too. This means good returns over a period of time. Stocks of large companies are also easy to sell due to greater market outreach. These are some of the reasons supporting investment in large companies.
What’s bad about investing in large companies?
Shares may be more expensive because of their extensive ownership. A large number of investors, including the institutional investors, own well known large companies that push demand for their shares. As a result, prices move up. Many investors in large companies hold shares for longer, thus keeping demand and share prices high.
Bottom line: If you are not a professional investor, start with investing in large-cap companies. They will make you familiar with the market and later you can start looking at smaller-cap companies.
The real questions that investors face are- How long will it last? Can the markets fall further, and by how much? Is there anything or something we do give the situation?
This is a good time to invest in small and mid-caps. From here the cycle is towards an uptrend. Prices of these companies are at their base and what could be better if you buy them at a base price and make profits at their appreciation.
From the current scenario, we see that the market cycles are routine and will continue to recur. In the context of the time frame of 10 years and more extended strategies, it simply doesn’t make sense to try and time the correction. For those investors that don’t have a plan B in their portfolio in place through structured products, to the extent of 30-40% of their portfolios- this is the time to review it once again. Structured products have been the perfect antidote to such markets.
Not only this, the current scenario states that Insurance has been a booming sector even when there’s an economic slowdown.
Thus, we see that it’s the perfect time to invest in small cap stocks at the moment and grab the advantages underlying it.