Learn about small-cap stocks to explore companies with lower market capitalisation that offer growth potential along with higher risk.
Small cap stocks are shares of companies with relatively small market capitalisation. These companies are typically in their early growth stages, have high expansion potential, and often operate in niche or emerging sectors. Because of their smaller size, small cap stocks tend to be more volatile but can also deliver significant long-term returns if the company grows successfully.
Small-cap stocks are generally associated with higher price fluctuations and may offer the potential for significant growth if the underlying companies expand successfully.
Small cap stocks refer to the shares of companies whose market capitalisation falls within a specific lower range, placing them below mid cap and large cap companies in size.
Market capitalisation formula:
Market Cap = Current Share Price × Total Number of Outstanding Shares
In simple terms, small cap stocks belong to companies that are still growing, expanding their operations, and trying to capture a stronger market presence.
Small cap companies share certain common features that distinguish them from mid and large cap firms.
Key characteristics include:
Lower market capitalisation compared to industry giants.
Higher growth potential, as they are often early-stage or emerging companies.
Greater price volatility, especially during market fluctuations.
Lower liquidity, meaning fewer buyers and sellers at any given time.
Limited analyst coverage, making them less transparent or less researched.
Higher business risk, particularly in uncertain economic environments.
Small-cap companies may experience changes in performance over time as they expand their operations.
In India, the categorisation of companies into small cap, mid cap, and large cap is defined by SEBI (Securities and Exchange Board of India).
As per SEBI’s classification:
Large Cap: Ranked 1 to 100 in market capitalisation
Mid Cap: Ranked 101 to 250
Small Cap: Rank 251 and beyond
This ranking system ensures clear separation of companies by size and helps investors make informed decisions.
Important points:
Market cap rankings are updated periodically.
Small cap companies can move to mid cap if their market value rises.
Indices such as Nifty Smallcap 100 represent this segment.
Examples of companies often categorised as small caps include:
Deepak Fertilisers & Petrochemicals Corp.
Balrampur Chini Mills
IndiaMART InterMESH
BEML Ltd.
Fashion and retail niche brands
Emerging tech companies
Examples vary over time as companies move between categories because of changes in market capitalisation.
These companies may not have the scale of large cap firms but often show innovative business models and strong growth potential.
Small caps offer benefits that appeal especially to long-term, high-risk investors.
Small-cap companies often expand operations as they develop.
Small-cap companies may evolve into larger firms over time.
Improved alpha generation compared to large caps during bullish phases.
Small-cap company valuations may shift over time.
Diversification value, as they belong to varied, niche sectors.
While they offer high rewards, small cap stocks also come with notable risks.
High volatility, causing sharp price fluctuations.
Lower liquidity, leading to difficulty entering/exiting positions.
Weak financial stability compared to larger companies.
Limited public information and analyst research.
Higher business risk, especially in economic downturns.
Greater sensitivity to market rumours and sentiment.
Evaluating the financial and operational information available about small-cap companies can help in understanding their business profile and associated risks.
Understanding how companies are classified by size helps you assess risk and growth potential more effectively:
| Feature | Small Cap | Mid Cap | Large Cap |
|---|---|---|---|
Market Cap Ranking |
251 and above |
101–250 |
1–100 |
Risk Level |
High |
Moderate |
Low |
Growth Potential |
Very High |
High |
Moderate |
Volatility |
Very high |
Moderate |
Lower |
Liquidity |
Low |
Moderate |
High |
Stability |
Lower |
Medium |
Higher |
This comparison highlights how company size affects risk-return characteristics.
The taxation rules for small cap stocks are the same as for all listed equity shares.
Tax type: Short Term Capital Gain (STCG)
Rate: 15% + cess
Tax type: Long Term Capital Gain (LTCG)
Rate:
Note: STT must be paid for the special tax rates to apply.
Small cap stocks represent companies that may exhibit varied growth patterns influenced by evolving business conditions over time. However, they come with increased volatility, liquidity challenges, and business risks. Investors usually balance small caps with stable mid and large cap investments.
Small caps belong to companies ranked 251+ by market capitalisation.
High risk, high reward segment often considered by long-term investors.
Proper research is essential before investing.
Taxation follows standard equity capital gains rules.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Small cap stocks refer to shares of companies that are ranked beyond the 250th position in terms of full market capitalisation. These firms are typically smaller in size and show relatively higher growth potential but also higher risk.
In India, the Securities and Exchange Board of India (SEBI) categorises companies ranked from the 251st position onwards, by full market capitalisation, as “small cap”.
Mid cap stocks represent companies ranked between 101st and 250th in terms of market capitalisation, and are generally larger and more stable than small cap companies. Small cap stocks, by contrast, are ranked 251st onwards, tend to be younger or less established, and carry relatively higher risk and variability.