What are Small Cap Stocks? Best Small cap stocks to buy today
When most investors start thinking of stock market investing, small cap stocks like Reliance industries TCS or Infosys cannot easily come to their mind. They are rather huge in terms of market capitalization, and massively invasive in terms of their impact. However, beyond the lure of large cap stocks is a relatively uncharted territory in the stock market — small cap stocks. Specifically in the current developing giant of India, where the economy is still packed with growth, small-cap stocks give a special purpose in so far as giving greater returns on a greater risk.
In this blog, let us explore small-cap stocks in India – what are they? Their advantages, disadvantages, or risks, and how they are suitable for the investment plan.
What Are Small Cap Stocks ?
However, before going deeper into small-cap stocks, one needs to know what small cap entails. Stocks are generally categorized into three segments based on their market capitalization:
Large Cap Stocks: Principal category for the purpose of the study: Indian companies with a market capitalization of greater than ₹ 20,000 crores.
Mid Cap Stocks: (b) Mid cap – the companies with market capitalization in between ₹5000 crores to ₹20000 crores.
Small Cap Stocks: Micro & Small cap companies classified as per their market capitalization having market capitalization of up to ₹5000 Crores.
Basically, the small-cap stocks are shares of small growing firms that have not grown to mid or large size firms. These firms are often young or still in the process of growing, existing in one or several specific industry segments or offering unique goods and services.
Attractiveness of Emerging Market: The Case of Small Cap Stocks in India
Speculative stocks particularly those of small capitalization and within the Indian context possess a certain je-ne-sais-quoi. Quite often, such firms act as trail-blazers and can be considered as the providers of the next wave of growth of the economy, initiators of formation of new sectors, leaders of technological shifts. The Indian economy gives small companies many opportunities as the country’s population is young, it urbanizes quickly, and has embraced digital solutions.
Key reasons why small cap stocks can be attractive to investors:
- High Growth Potential
Small capitalized firms are still in earlier market development stages so they are capable of expanding significantly. Often enough small cap stocks refer to growing or innovating companies which makes such stocks possible candidates to become multibaggers shares that may grow many times in value.
For instance, the large cap Indian stocks in the current list that began their journey with small cap stocks are Eicher Motors and Bajaj Finance. Those who nurtured the dream by investing right from the early stages of its emergence reaped good returns as these firms expanded their business operations.
- Undervalued Opportunities
A lot of these small capitalization companies may be unknown to institutional investors, meaning the stock might not have its complete valuation assigned to it. This creates a chance for the conducting market research to locate fine stones before they turn into pearls. For instance, when a small capitalized enterprise belongs to a specific sector, which in the future will develop particularly actively, the shares in which at the present time can be purchased at a relatively low price.
- Diversification
Small capitalization companies may be in industries or specialties that are incongruous with large capitalization companies, giving investors a means of diversification. With the investment in small caps, one is able to get exposure to a new economy which is different from the large cap economy in as much as the later might be performing dismally.
- Less Analyst Coverage
Because small cap companies are typically unattractive to big institutional investors in terms of holdings, small-company stocks are not as closely scrutinized by analysts. This adds complexity to the market pricing and thus gives smart traders the opportunity to find blunders from the rest of traders.
- Higher Returns Over Time
Small caps over the long time outperform large caps but they are more volatile and risky compared to large caps. Rising tides lift all boats: Despite offering exposure to multiple industries and sectors in an economy that is expecting to grow at 8-9% per annum, it is possible for many small-cap firms to reward value investors with rich returns in the long-run.
Best Small Cap stocks to buy today
| SL | Company Name | Sector | Market Cap |
| 1 | Balaji Amines Limited | Specialty Chemicals | INR 7,500 crores |
| 2 | Fineotex Chemical Limited | Specialty Chemicals | INR 4600 crores |
| 3 | Heranba Industries Limited | Agrochemicals | INR 1900 crores |
| 4 | Deepak fertilizers and petrochemical Corporation limited | Fertilizers and Chemicals | INR 13600 crores |
| 5 | Aarti Drugs Limited | Pharmaceuticals | INR 8,000 crores |
1. Balaji Amines Limited
- Share Price: Rs. 2240/-
- Sector: Specialty Chemicals
- Market Cap: ~ INR 7,500 crores
The Balaji Amines Limited is an eminent manufacturer situated in India and it specializes in the manufacture of aliphatic amines and its products. The company’s manufacturing division has a wide range of products for pharmacy, agriculture, and rubber sectors.
Why Balaji Amines?
- Strong Revenue Growth: The operations of Balaji Amines have over the recent past posted impressive revenues year after year. As for the company’s prospects, owing to the raised interest in its production in many fields, it will be able to grow further.
- Capacity Expansion: The company has been increasing its production capacity to the rising demand especially in specialty chemicals segment.
- Global Reach: Balaji Amines Company has been able to cultivate itself in the two major markets in the country as well as exporting its products to many other countries. It also earns a good sum of its export revenues, thus gradually cutting down its reliance on the Indian market alone.
- Investment Outlook: Due to the COVID-19 pandemic impacts, focus on pharmaceutical and agrochemical segments post COVID-19 should provide further upliftment to Balaji Amines benefitting from the increased demand of specialty chemicals.
2. Fineotex Chemical Limited
- Share Price: Rs. 406/-
- Sector: Specialty Chemicals
- Market Cap: ~ INR 4600 crores
Fineotex Chemical Limited was established in 1982 and was specialized in producing specialty chemicals for textile, agrochemicals and household cleaning. This has placed the company inn a vantage position to offer high quality and new products which has made it have a strong reputation.
Why Fineotex Chemical?
- Strong Customer Base: Fineotex has diversified customers over a wide geographical locations within India and International markets. It has been demonstrated that it has a long term association with its clients in textile business which are a continuous cash flow.
- Sustainable Growth: High operational efficiency has seen the company post a sustained and consistent earnings growth. It has displayed over 10% revenue growth rate and this has been used in all market environments.
- Environmentally Friendly Products: Following the sustainability approach, Fineotex has been working on the development of biodegradable chemical products to meet the ever growing global market for eco-friendly products.
- Investment Outlook: Indeed, as the global textile industry recovers, and the need for sustainable options grows, Fineotex Chemical is poised to grow.
3. Heranba Industries Limited
- Share Price: Rs.475/-
- Sector: Agrochemicals
- Market Cap: ~ INR 1900 crores
Heranba Industries Ltd is an Indian agrochemical major and the business basically pertains to crop protection chemicals, pesticide, bug spray, etc. At present, the company has tied up facilities in domestic market as well as in international market.
Why Heranba Industries?
- Rural Growth Story: The rural area of India is poised for a definite increase in consumption of goods and hence the crop protection chemicals being used are on the rise. Heranba is well placed to avail this opportunity due to its good product mix which will suit the farmer.
- Export Potential: Heranba distributes its products all over the world that means it has an opportunity to enter into export market.
- Capacity Expansion: The market demand for agrochemicals around the world is rising rapidly and especially in the developing countries and thus the company is setting capacity to meet required quantities of agrochemicals.
- Investment Outlook: Heranba Industries has built business strength in the agrochemical segment and the sales of crop protection products have always been in demand. Therefore, Heranba could well be a suitable proposition for investors who would like to place their money in the Indian agriculture space and at the same time, have access to global agrochemicals markets.
4. Deepak fertilizers and petrochemical Corporation limited
- Share Price: Rs. 1030/-
- Sector: Fertilizers and Chemicals
- Market Cap: ~ INR 13600 crores
Deepak Fertilizers and Petrochemicals Corporation Limited is one of the fastest-growing chemical players in India focused on the production of fertilizers, industrial chemicals and mines and ultimate chemicals. It is a nicely diversified company and supplies to various segments including agriculture, construction & mining.
Why Deepak Fertilizers?
- Integrated Business Model: Organic integration across chemicals and fertilizers offer operational efficiency as well as cost benefits in its integrated business model.
- Strong Financials: Deepak Fertilizers has steady, high and good revenue growth and profitability showing better management and operational activities.
- Favorable Government Policies: The current government of India has given agriculture and infrastructure growth topmost priorities thus providing chances for firms such as Deepak Fertilizers that deal with products that are used by both sectors.
- Investment Outlook: Deepak Fertilizers has the opportunity to benefit from favorable factors due to a government plan for the construction of infrastructure and enhancement of agricultural production.
5. Aarti Drugs Limited
- Share Price: Rs. 510/-
- Sector: Pharmaceuticals
- Market Cap: ~ INR 8,000 crores
Pharma ingredients and bulk drug and active pharmaceutical compounds are manufactured by Aarti Drugs Limited, which is one of the well known companies. I want it to have the capacity to supply its product in the local market and also in the export market.
Investment Outlook: Consumption of pharmaceutical product and APIs has been increasing globally and thus has a potential for Aarti Drugs to expand its business in the growing Indian and foreign market. The following are some of the most relevant reasons that give enough cross-check to go through with an investment on the stock of Aarti Drugs for the those investors who wish to invest in the pharmaceutical sector.
Undoubtedly, small-cap stocks can be considered as great opportunity for those attracting more people ready to invest in companies’ growth. As it is seen with every high risk investment, they are comparatively more risky than large-cap or mid-cap stocks but they could offer much higher returns. In this blog post, I have outlined small-cap stocks which are in industries which are set to grow in the future and hence the best stocks to buy.
Why Aarti Drugs?
- Strong API Business: The API segment has emerged as a core operation area for Aarti Drugs that has received renewed traction due to the growing trend of weaning off China for APIs.
- Operational Efficiency: The company also presents good financial health evidenced by steady increase in annual revenues and profits year after year.
- Export Growth: Aarti Drugs ships its products to over one hundred nations; this is a source of diversification and growth.
- Investment Outlook: Global consumption of pharmaceutical products and APIs has been on the rise and it poses a great business opportunity for Aarti Drugs to penetrate the expanding Indian and international markets. There are many reasons which make Aarti Drugs an attractive stock for those investors who wish to invest in the pharmaceutical industry.
The Risks of Small Cap Stocks
However, what has extra benefits is also paired with risks in the investment formula of small-cap stocks. Understanding these risks is crucial for any investor looking to explore this space:
- Higher Volatility
That is not to suggest that small-cap tends to be more volatile than large-cap stocks; it does mean that it has a tendency of being more volatile. It is volatile because its stocks fluctuate depending on conditions in the market, any news, or specific occurrences in the firm. Consequently, they can post higher short term risks, and, therefore, are not recommended for investors who are sensitive to risk, or who intend to invest in the market for short-term.”
- Liquidity Concerns
Small cap stocks are usually characterized by low trading volume challenges as to liquidity. Liquidity therefore embraces the ease with which investors can either purchase or sell large volumes of stocks without influencing the stock’s price. This can also lead to expansion of bid-ask spreads making trading to be costly.
- Lack of Information and Transparency.
Small cap companies are usually not analyzed or reported on as frequently by analysts or the media, thereby making it quite difficult to get a wealth of information of the firms’ operations, managerial teams and growth prospects. This lack of transparency enhances risks going with expensive small capitalization stocks because accuracy and reliability of such information cannot be easily ascertained.
- Business Risk
that means small-cap companies can become considerably high-risk organizations because they are still in the growth phase of their development. Some of these risks can be arising from weaker balance sheets, fewer customers, or less resources, or increased susceptibility to adverse economic conditions. Small-cap differences can be seen in operating activities; they may not be able to weather bad market conditions hence making investors loss their money.
This article sticks to a single topic which is the correct way of investing in the small-cap stocks of India.
Strategies to keep in mind :
- Research Is Key
Since there is actually very little publicly written about small-cap companies in general, research is critical. Identify industries with good fundamentals and get companies with a good growth story, good basic numbers, and good management teams. It is also necessary for the company to have a certain outlook on the specific industry among which it works, it’s advantages and threats.
- How to Build a Small-Cap Portfolio
As potential wealth creators, small-cap stocks look attractive; but investors should not put too much money on them at once. Never invest all your money in one or two small-cap stocks. They should rather spread their investment over different firms and industries to avoid high-risk.
- Think about Small Capitalization Mutual Funds or ETFs
In addition, small-cap stocks can be an excellent option for those who do not have adequate time or knowledge to invest in individual, sometimes unknown, small-cap companies, because small-cap mutual funds or Exchange Traded Funds can be a good solution. These are funds that collect money from several investors to purchase a basket of multiple small-cap stocks for professional fund managers with knowledge of identifying profitable firms.
- Just have the long-term vision and be patient.
While small cap stocks are stocks of relatively small companies, these stocks can take time to turn into the full potential. As a result, it is appropriate to sustain a long-time investment horizon because high volatility indicates high risk. That’s why it is important to talk about small cap stocks’ long-term opportunities as most of them can experience short-term volatility.
Conclusion
Undoubtedly, small-cap stocks can be considered as great opportunity for those attracting more people ready to invest in companies’ growth. As it is seen with every high risk investment, they are comparatively more risky than large-cap or mid-cap stocks but they could offer much higher returns. In this blog post, I have outlined small-cap stocks which are in industries which are set to grow in the future and hence the best stocks to buy.
Of course, it is always wise that investors do some research and ask yourself how much risk are you willing to take before investing in small-cap stocks. Patience, diversification to spread risk, and a long-term investment goal are ways of getting the most of out of this high-growth sector.
Also Read :Top nifty 50 stocks list with price & nifty index
FAQ'S
What are small cap stocks ?
Small cap stocks to buy today are production shares that belong to comparatively small companies in terms of their market quantity. These are usually companies, which feature beyond the top 250 in terms of market capitalisation in India. In many cases, their market capitalization is below ₹5,000 crores.
What is the difference between large-cap, mid-cap, and small cap stocks ?
- Large-cap stocks: High capital businesses and will typically be more than 100 business companies from the perspective of market capitalization.
- Mid-cap stocks: Small companies what can have a capitalisation as low as 100 and as high as 250.
- Small-cap stocks: Small companies that are located at other ranks in the market other than the first 250 this is referred to as small companies.
Are small cap stocks riskier than large-cap or mid-cap stocks ?
Indeed, as we define small cap stocks as the shares of firms that have a market capitalization lower than mid-cap stocks, such stocks are predicted to be riskier in terms of their stock price and market trading when compared with large and mid-cap ones. However, they also provide higher returns from the company if such an entity registers better performance on its securities.
Why do investors choose small cap stocks ?
Investors use small cap stocks for their high growth of the company and potentiality. These firms are relatively new and are in their early growth cycle stage than, say, large-cap firms, making it possible to expand and give good returns in the future.
