Large Cap VS Mid Cap VS Small Cap stocks
Large Cap vs. Mid Cap vs. Small Cap stocks
A company has grown over 100% in the last decade, it definitely has to be the perfect stock to buy, right? Well, not necessarily. One of the most common misconceptions amongst new investors is that large-cap companies (well-established companies with a market cap of ₹20000 cr or more) are the only investments that can provide extravagant returns. However, what they do now understand is that even mid-cap or small-cap companies could do so. To understand how this could be possible, let us investigate the topic in depth.
About Large Cap Companies-
First and foremost, large-cap companies are more mature companies that are well established with good control over the market with a higher market share than mid and small-cap companies. One of the main advantages of investing in such companies is to make your portfolio less volatile. Some of the large-cap companies in India include Hindustan Unilever, Reliance Industries, Infosys, HDFC Bank, and many more. However, despite the companies having less risk, they still do not fall into the category of ideal stocks that you should buy as over the period of time, these companies have definitely grown at a rapid pace and provided their shareholders with huge amounts of wealth, but they now have saturated stock prices with high PE ratios, making them overpriced investments now.
Next up: Mid Cap companies-
First of all, Mid-cap companies have a market capitalization of more than ₹5000 cr but less than ₹20000 cr. These companies are the key way to diversify your portfolio and have higher credibility than small-cap companies and a higher potential for growth over the years compared to large-cap companies. However, some of these might not be that widely known by the public with fewer appearances on blogs and channels to come on investors’ radars which might make the growth of the company stagnant for some time. However, this can be overcome eventually as the company has better growth, profits, and results.
Small Cap companies-
These companies are the ones with a market capitalization of ₹5000 cr. These companies have the highest potential for growth as compared to mid and large-cap companies. Imagine this, what if your grandfather had once identified the potential in a small-cap company years ago and bought its shares in bulk that had now turned out to be a large-cap company. Just think of the profit he would have made with the compounding of all these years on a company with such a lesser value as a small-cap company to be valued so much down the line. However, the most prominent disadvantage of investing in a small-cap company is its high risk. Even though these companies could have a high potential for growth, it is still potential. Lesser information available about the business reduces the assurance to investors that their hard-earned money will not go crashing down with the company’s stock.
Which is the most preferable level of capitalization?
As analyzed in the content above, the least risk available is with large-cap companies, the highest diversification can be done best across mid cap companies and the highest potential for growth in the future is in small-cap companies. However, at the end of the day, how do you decide which one is the perfect choice for your portfolio that suits your financial position right now? Well, the only way to know is to understand what amount of risk you can take and still be a patient investor and what is the minimum amount of growth that you expect your portfolio to have each year to not make drastic changes for growth. If you are willing to put in hours for tedious research of companies to evaluate risk and reward, then researching small-cap companies that have the potential to grow would be best for you. On the other hand, if you are not well versed in investment concepts and procedures to understand a company’s fundamentals, investing in a well-known business in the large-cap that has low risk will be better for you, however this would make you lose out on the high returns as these stocks’ prices would already be close to their saturation limit after a point.
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