Small- and Mid-Cap Stocks: Debunking the Major Myths

1. Small- and Mid-Cap Stocks: Debunking the Major Myths

2. Introduction • Evaluating a stock involves various parameters and criteria, including the market trends and economic situations, the stock’s performance on various metrics, and one’s investment goals and risk tolerance. However, registered investment advisors suggest that market capitalization is another important aspect that investors need to consider while opting for mutual funds. • In its most basic sense, market capitalization refers to the size of the company offering the assets as well as its total shares outstanding.

3. Shares offered by incipient firms with a lesser number of shares in the market are referred to as small-cap shares. • On the other hand, stocks offered by large and well-established companies offering many shares are referred to as large-cap shares. • Thus, mid-caps are the ones offered by companies that are neither too well-established nor at the basic embryonic stage. While each of these capitalization levels has its own set of pros and cons, some investors often steer clear of small- and mid-cap shares owing to certain myths around the same. So, let us debunk some of these myths and understand small- and mid-cap shares with better clarity:

4. Myth #1: Small- and Mid-Caps are Not the Right Avenues When the Market is Down. • A bear-market situation increases the risks involved in all investment avenues at some level. However, investing in small- and mid-caps during this time does not entail any exclusive risks that you may not undertake in case of other investments. In fact, the some of the small and mid-cap mutual funds may even be undervalued, and in such cases, it may help in the long run to invest one’s corpus in these avenues. The best bet would be to decide what shares to buy based on an evaluation of the company selling the stock – its industry, goals and vision, NAV and so on.

5. Myth #2: Small- and Mid-Caps are Risky. • Yes, small-cap and mid-cap avenues are offered by budding firms and organizations that are just gaining a firm foothold in their respective industries. However, this does not imply that the stocks and other assets offered by such firms would always lead to losses. In fact, small- and mid-caps often have a huge potential to develop and expand in the long run. What matters is whether you earmark the right small-cap and mid-cap shares based on sound technical and fundamental analysis of the stocks in question.

6. Myth #3: Large-Caps are Better Quality Investments than Small- and Mid-Caps. • Investors often believe that large-caps are better-quality investment avenues as compared to small- and mid-caps. This misconception typically emerges from the fact that large caps are offered by well-established companies which have already offered sufficient shares in the market. However, the quality of a small-cap depends less on the number of shares outstanding and the stature of the company and a lot on whether the organization or firm is reliable and credible. While making your investment plans, make sure to personally interact with the owners of the company and understand whether their money is really where their mouth is.

7. Conclusion • Small- and mid-cap stocks are important investment vehicles in the share market as they carry the possibility of substantial growth and expansion. Understanding one’s requirements and goals and analysing the specific investment avenues carefully can help one to avoid the risks and reap significantly high returns from these shares. We would love to help you earmark the right small- and mid-cap stocks for your portfolio.