The Hidden Risks of Investing in Small-Cap Stocks
Retail investors have been significantly impacted by the recent downturn in micro-cap stocks. These small companies, with market capitalizations up to Rs 5,000 crore, have seen substantial declines in value. Since September, nearly a quarter of the 1,300 micro-cap stocks on the National Stock Exchange (NSE) have dropped by at least 20%, with some falling as much as 60%.
Retail investors, who hold up to Rs 2 lakh in shares per company, have been particularly affected. Their investments in small-cap stocks have surged since the pandemic, reaching a 15-year high as of September. In many cases, retail investors hold a significant portion of these stocks, sometimes over 80%, while promoters have reduced their stakes.
The enthusiasm for small-cap stocks has been driven by the potential for high returns. However, these stocks are highly volatile and susceptible to market fluctuations. Promoters, who have a better understanding of their companies' performance, have been selling their shares, leaving retail investors more exposed to the risks.
The recent market correction has highlighted the dangers of investing heavily in micro-cap stocks. Many of these companies were overvalued, trading at high multiples despite minimal or no profits. As the market adjusts, retail investors are likely to face further losses. You can read more on the subject here & here.
In conclusion, while small-cap stocks can offer significant returns, they also come with substantial risks. Retail investors should be cautious and consider diversifying their portfolios to mitigate potential losses.
