Stocks on BSE Sensex, Nifty 50, and Nifty Smallcap 100 have lower earnings. Large-cap companies are less attractive to investors due to US Central Bank's interest rate hikes and market volatility. Small-cap stocks, with higher growth potential than large-cap counterparts, are becoming more popular.

Small-cap stocks belong to companies in the early stages of growth with market capitalization below ₹500 crores. Investing in small-cap stocks carries higher risk. However, when the market recovers and economic conditions improve, small-cap stocks can benefit from increased investor interest, leading to significant returns.

Benefits of Investing in Small-Cap Stocks

Investors will invest in small-cap stocks today when they believe such stocks can become large-cap henceforward.

• Massive Growth Trajectory: Small-cap stocks have the potential to grow because of their size in comparison to large-cap companies. Thus investors can enjoy increasing profit margins.
• Less Prone To Market Volatility: Small-cap stocks are relatively domestic and less subjected to geopolitical risks.
• Lower Initial Investment: Small-cap companies price their shares much lower than large-cap firms. It makes initial investment comparatively easy.
• Not Just Start-ups: A small-cap firm is only sometimes a start-up. Many such companies have been doing business for quite some time and belong to multiple industries. It offers a wide avenue for investors looking to park their funds.
• Undervalued: Large and mid-cap companies are known to investors more than small-cap ones. Thereby, information regarding small-cap firms is only sometimes available. Such shares are grossly undervalued, with the scope to increase drastically.

Factors to Consider Before Investing in Small-cap Stocks

1. History

Looking at historical performance is essential for analyzing a company's business performance. Key indicators are sales growth, profit margin growth, and return ratios like ROE, ROCE, and ROIC. Ensure these indicators still hold true before investing.

2. Management

• Check if the management is aligned with minority shareholders. Ensure no past incidents of promoter cheating have occurred.
• Look for a clear vision, the ability to make decisions under harsh conditions, and the capacity to help the business grow sustainably.
• Check promoter holdings before investing.
• Check how much money the company's management takes home directly or indirectly.
• Ensure there are no legal or regulatory cases on the promoters.

3. Related party transactions

Check how much percentage of total sales is done to related parties. Ensure the interest rate is not lower than the market rates. Check if any significant write-offs of loans have been given to related parties.

4. Environment

Do multiple channel checks with distributors, dealers, and employees of the company to fact-check the ground reality.

5. Value trap

Be careful of scenarios where a stock is cheap and stays cheap for long periods of time. Consider what is missing that the market knows.

6. Capital allocation

Be cautious when there are too many unrelated investments on the balance sheet.

7. Audit

Read the auditor's report, audit firm, and check for any changes in auditors.

8. Contingent liabilities

Track this as a percentage of total liabilities. Be cautious when there are guarantees against loans to promoters or related entities.

9. Cash

Check if the business can convert returns and profits to cash.

10. Bad times

Check how the company tackled a bad time or scenario and the management's reaction.

List of 5 Small Cap Stocks Worth a Look

1. Ujjivan Financial Services

• Ujjivan Financial Services is a microfinance company based in India.
• The company was founded in 2004 and is headquartered in Bengaluru.
• Ujjivan provides financial products and services to under-served and unserved segments of the population, with a focus on low-income groups and women.
• Ujjivan's offerings include microloans, savings accounts, and insurance products.
• As of January 16, 2023, the company's market price was ₹267.
• Over the last six months, the share price of Ujjivan Financial Services has risen by nearly 70%, making it one of the best small-cap shares currently available.

2. Gokaldas Exports Limited

• Gokaldas Exports Limited is a leading textile and garment manufacturer and exporter based in India.
• The company was founded in 1979 and is headquartered in Bengaluru.
• Today, it is one of the largest exporters of ready-made garments from India, with a strong presence in the US and European markets.
• The company offers a wide range of products, including shirts, trousers, shorts, skirts, and dresses for men, women, and children.
• As of January 16, 2023, the current market price of Gokaldas Exports was ₹377, which represents a nearly 12% increase over the past six months.

3. Bajaj Consumer Care

• Bajaj Consumer Care Limited is an Indian consumer goods company engaged in the manufacturing and marketing of personal care and home care products.
• The company is a part of the Bajaj Group, one of the most diversified and respected conglomerates in India.
• The company's product portfolio includes toilet soaps, liquid soaps, hair oils, hair gels, talcum powders, and more.
• It has a strong distribution network across India, with its products being available in most retail outlets and supermarkets.
• The company offers several well-known and trusted brands, including Bajaj Almond Drops Hair Oil, Bajaj Nomarks Cream, and Bajaj Brahmi Amla Hair Oil.
• As of January 16, 2023, the company's share price was around ₹173, representing a growth of approximately 7% over the previous six months.

4. Delta Corp

• Delta Corp Limited is a leading Indian gaming and hospitality company.
• It was founded in 1996 and is headquartered in Mumbai, India.
• The company operates several casinos and offshore gaming vessels, as well as several luxury resorts and hotels.
• Delta Corp is the only company in India with a nationwide license to operate live and electronic gaming.
• It operates primarily in two segments: the casino and hospitality segments.
• The company has received several prestigious awards and certifications for its commitment to quality, customer service, and corporate responsibility.
• As of January 16, 2023, the company's shares were priced at ₹211, representing an increase of around 20% over the past six months.

5. Thyrocare Technologies Limited

• Thyrocare Technologies Limited is a leading Indian diagnostics company that provides various laboratory services for individuals and organizations.
• Thyrocare offers extensive diagnostic tests and services, including clinical pathology, biochemistry, haematology, and histopathology solutions.
• The company operates a central laboratory and a network of collection centers throughout India.
• Thyrocare has earned accreditation from several national and international organizations, such as the National Accreditation Board for Testing and Calibration Laboratories (NABL) and the College of American Pathologists (CAP).
• As of January 16, 2023, the market price of the company's shares was ₹566. During the past six months, Thyrocare Technologies Ltd's shares have experienced tremendous growth, reaching the ₹700 mark as well.

Grow your Investments With Small Cap Stocks

The massive Indian market offers plenty of avenues to increase your investment portfolio. Yet, the economy is undergoing market instability. Avoiding highly volatile large-cap stocks and investing in growth-oriented small-cap stocks can be a valuable feather in your investment hat.

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Frequently asked questions

1. Are small-cap stocks risky?

Small-cap stocks can be risky. They have substantial potential to grow but also equal chances of failing. Also, less information is available about these stocks. It can lead to a subpar understanding of the company.

2. What is the best small-cap stock?

For a company, both earnings and sales are crucial. Since small-cap firms have restricted cash flows, they need significant sales. Any company with a robust revenue growth rate can be the best small-cap stock. Another parameter is operating margins. A firm with rising operating margins indicates it generates considerable profits from sales.

3. Which penny stock is multibagger?

Some multi-bagger penny stocks to look out for this year are -

• Suzlon Energy Ltd.
• Reliance Power
• Vodafone Idea
• Alok Industries Ltd.
• Yes Bank Ltd.