What Is a Small-Cap Stock?

A small-cap stock is a stock issued by a public corporation with a total market value of $250 million to $2 billion. The specific statistics differ.

Small-cap stock investors are often seeking for fast-growing, up-and-coming emerging firms. That is, they are seeking for the next generation of large-cap stocks.

ABOUT : What does Icahn Enterprises do?
Icahn Enterprises L.P. is a diversified holding company engaged in seven primary business segments: Investment, Energy, Automotive, Food Packaging, Real Estate, Home Fashion and Pharma. Icahn Enterprises L.P. is a Delaware master limited partnership.

Net worth : 650 crores USD


  • A small-cap stock is one that has a market valuation between $300 million and $2 billion.
  • By focusing on growth possibilities, small-cap stock investors hope to outperform institutional investors.
  • Small-cap stocks have beaten large-cap companies in the past, but they are also more volatile and risky.

  • Understanding Small-Cap Stocks

    The term "cap" refers to capitalization. Market capitalization is the phrase in its whole.

    Classifications like "large-cap"and "small-cap" are rough estimates that fluctuate over time. Furthermore, brokers ' definitions of small-cap stocks vs. large-cap stocks may differ.

    One common misperception regarding small-cap stocks is that they are fresh new enterprises. In actuality, many small-cap stocks are of well-established firms with robust track histories and excellent financials. Small-cap stock prices have a higher possibility of rising since they are smaller.

    Small-Cap Stock vs. Large-Cap Stock

    Small-cap stock businesses, on average, provide investors with more opportunity for development, but they also carry more risk and volatility than large-cap stock companies.

    A large-cap offering has a market value of at least $10 billion. Aggressive growth may be in the rearview mirror for large-cap stock firms like General Electric (GE) and Coca-Cola Co. (KO). Such firms provide investors with stability and income, but rarely quick growth.

    Small-cap stocks have historically outperformed large-cap companies. However, whether smaller or larger enterprises do better over time varies depending on the overall economic condition.

    During the 1990s tech boom, for example, large-cap stock firms prevailed, with investors flocking to equities like Microsoft (MSFT), Cisco (CSCO), and AOL Time Warner. After the bubble burst in March 2000, small-cap stock companies outperformed large caps, as many of the large caps lost value in the fall.

    One advantage of investing in small-cap firms is the possibility of outperforming institutional investors. Many mutual funds have internal regulations prohibiting them from investing in small-cap stock firms. Furthermore, under the Investment Company Act of 1940, mutual funds cannot possess more than 10% of a company's voting shares. This makes building a substantial stake in small-cap equities challenging for mutual funds.

    Small-Cap Stock vs. Mid-Cap Stock

    Small-Cap Stock Mid-Cap Stock
    The companies ranked from the 251st position onwards in terms of market capitalization are known as small-cap companies. The market cap for these companies is below Rs.5000 crores. The mutual funds that hold stocks from the small-cap are called ‘Small-cap funds’. SEBI established a rule in the year 2017, according to which companies that are ranked from 101 to 250 in terms of market capitalization are known as mid-cap companies. The market cap for these companies will be around Rs.5000 to Rs.20000 crores. Mutual funds that hold stocks from the mid-cap are called ‘Mid-cap funds’.
    Small-cap companies don’t have a long track record. For example, a start-up company or a company that is under development can fall under the small-cap sector. These companies are mostly not included in the broad market indices because of their negligible market presence. Mid-cap companies also have a good track record, but the difference is noticeable compared to large-cap companies. Mid-cap funds are involved with more risk than large-cap funds. Mid-cap companies may or may not be included in broad market indexes due to their limited market presence.
    Risk Profile : Small-cap stocks are riskier than the mid-cap fund. Despite the risk, these stocks have great growth potential Risk profile : Mid-cap are slightly riskier than large-cap stocks and less risky than small-cap stocks
    Liquidity and volatility : Small-cap stocks are more volatile and have less liquidity Liquidity and Volatility : Mid-cap funds have moderate volatility and moderate liquidity
    Return : Despite being the highest-risk scheme, they offer very good returns. The average of the last 5 years has been 14.74%. Return : The average returns of mid-caps from the past 5 years were around 10.28%. They offer better returns compared to large-cap funds.

    Returns for Large-Cap, Mid-Cap and Small-cap stocks

    Small-cap stock vs Penny Stock

    Small-cap and penny stock shares have smaller market value than large- or mid-cap stocks. Because penny stocks have minimal market capitalizations, they may be classified as small-cap stocks. However, there are some features that distinguish a stock as a penny stock that not all small-cap stocks have.

    Penny stocks have share values that are less than $5. Some of them are listed on the New York Stock Exchange. Most, however, are traded over the counter (also known as "pink sheets") rather than through a stock market. Penny stocks are considered high-risk investments due to the following factors:

  • Low cost
  • Inadequate liquidity
  • Broad bid-ask spread

  • Small-cap stocks, unlike penny stocks, can have a share price larger than $5. They are classified according to their market capitalisation.

    Advantages of Small-Cap Stocks

  • Growth potential : Because these firms are smaller, they have more growth potential than large-cap enterprises. This means that investors in them stand to earn significantly.
  • Lower share price : Small-cap stocks frequently have lower share prices, making your first investment easier. Furthermore, mutual funds and hedge funds cannot artificially raise share values since restrictions prohibit financial institutions from investing extensively in them.
  • Various businesses : Small-cap firms are more than just start-ups. They may be found in various sectors, and many of them have been in operation for quite some time. This opens up a number of investment opportunities.
  • Less popular : Small-cap firms are less well-known than large- and mid-cap corporations since there is less popular information about them. This implies they are frequently underpriced and might deliver a good return on investment.

  • Disadvantages of Small-Cap Stocks

  • Volatile prices : Because they have less financial buffer than bigger enterprises, smaller companies respond more to market volatility. As a result, small-cap companies might experience large price volatility.
  • High risk : While small-cap firms have a lot of development potential, they also have a lot of failure potential. Small-cap stocks are more risky than large-cap equities. Companies with limited access to investment capital are more vulnerable to market shifts. As a result, they are a riskier investment.
  • Less available information : Small-cap firms receive less attention from financial institutions and analysts than large- and mid-cap corporations. As a result, before investing, you must have a thorough grasp of company value and the time to conduct your own research.
  • Low Liquidity : Because small-cap firms are smaller and less popular, their stock is less liquid. When a firm is less well-known, it might be more difficult to identify a seller when looking to acquire shares. It may also be more difficult to sell shares if you wish to abandon the market.

  • How to invest into Small-Cap Stocks ?

  • Earnings and revenue growth : Even if a firm isn't yet profitable, it should be expanding and increasing its revenue.
  • Price-to-earnings ratio (P/E ratio) : The P/E ratio compares the current share price to earnings per share to determine the worth of a company's stock.
  • Price-to-sales ratio : If the firm does not yet have earnings per share, the P/S ratio can be used to evaluate how it compares to comparable small-cap companies.

  • If researching individual small-cap stocks is too time-consuming or seems too risky, you can also buy small-cap mutual funds or exchange-traded funds (ETFs). These might track broad small-cap indexes, specific industries within the small-cap market, or investment goals like value or growth.

    Best Small-Cap Funds

    Axis Small Cap Fund Direct Growth

    ABOUT : Axis Small Cap Fund Direct-Growth scheme's ability to deliver returns consistently is in-line with most funds of its category. Its ability to control losses in a falling market is average. The fund has the majority of its money invested in Healthcare, Financial, Chemicals, Capital Goods, Technology sectors.


    Fund Size : 15847.24Cr

    Equity : 89.5%

    Cash: 10.6%

    Debt : -0.1%


    Construction : 16.5%

    Healthcare : 13.4%

    Financial : 13.2%

    Chemicals : 12.6%

    Technology : 9.7%

    Others : 8.1%

    Automobiles : 7.9%

    Capital Goods :6.5%

    Metal & Minings : 6.4%

    Consumer Staples : 5.7%

    Quant Small Cap Fund Direct Plan Growth

    ABOUT : The fund has an expense ratio of 0.77%, which is close to what most other. Quant Small Cap Fund Direct Plan-Growth scheme's ability to deliver returns consistently is higher than most funds of its category. Its ability to control losses in a falling market is below average.


    Fund Size : 8075.15Cr

    Equity : 85.1%

    Cash: 10.5%

    Debt : 4.3%


    Financial : 20.1%

    Construction : 13.7%

    Metal & Minings : 12.1%

    Services : 11.9%

    Others : 11.8%

    Healthcare : 10.3%

    Capital Goods :8.3%

    Chemicals : 6.6%

    Textiles : 5.2%

    Edelweiss Small Cap Fund Direct Growth

    ABOUT : Small Cap Funds offer great potential to earn benchmark-beating returns. However, these are highly risky investments and should be considered only if you can stomach the volatility in prices


    Fund Size : 2360.59Cr

    Equity : 97.9%

    Cash: 2.6%

    Debt : -0.5%


    Capital Goods :16.7%

    Financial : 12.4%

    Construction : 11.8%

    Healthcare : 11.1%

    Services : 8.7%

    Consumer Staples : 8.0%

    Others : 7.0%

    Chemicals : 6.3%

    Technology : 6.1%

    Automobiles : 5.9%

    Metals & Mining : 5.9%

    ICICI Prudential Smallcap Fund Direct Plan Growth

    ABOUT : These funds are more volatile than large caps, so there's a greater risk of losing money in the short term. Short-term investing in mid and small-cap funds can be volatile and risky.


    Fund Size : 6989.26Cr

    Equity : 91.6%

    Cash: 8.4%


    Services : 19.5%

    Healthcare : 15.3%

    Capital Goods :13.5%

    Chemicals : 12.0%

    Automobiles : 9.4%

    Others : 9.2%

    Construction : 8.5%

    Technology : 6.3%

    Financial : 6.2%

    Kotak Small Cap Fund Direct Growth

    ABOUT : otak Small Cap Fund Direct-Growth is a Equity mutual fund scheme from Kotak Mahindra Mutual Fund. This scheme was launched on Invalid date and is currently managed by its fund manager Pankaj Tibrewal. It has an AUM of ₹12,285.82 Crores


    Fund Size : 12285.82Cr

    Equity : 92.8%

    Cash: 7.3%


    Chemicals : 16.3%

    Capital Goods :13.4%

    Consumer Discretionary : 11.0%

    Metals & Mining : 10.4%

    Services : 8.5%

    Construction : 8.5%

    Others : 8.2%

    Technology : 6.3%

    Consumer Staples : 6.1%

    Automobiles : 6.0%

    Financial : 5.2%

    Is Small-Cap Beneficial in the Long Term?

    Yes, small-cap stocks may be profitable in the long run. If you can buy in a small-cap business with strong fundamentals and an overall positive analysis, the stock will most certainly expand over time. If you can invest before a market bull run and keep the stock for the long term, you might see a significant financial return.

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