Which are riskier large-cap stocks or small-cap stocks?
Small-cap stocks are riskier and more volatile investments, as they do not have the same financial resources large-caps do and are still developing their businesses.
Equity stocks of small and mid-cap companies carry greater risk, and more volatility than equity stocks of larger, more established companies. Diversification does not ensure a profit or protect against a loss in a declining market.
When investors select their stocks, they must decide between risk and reward. Large-cap stocks usually belong to large, established companies and are safer investments than small- or mid-cap stocks.
Mid-cap stocks generally fall between large caps and small caps on the risk/return spectrum. Mid caps may offer more growth potential than large caps, and possibly less risk than small caps. Small-cap stocks tend to be, on average, least developed publicly traded companies, although there are exceptions.
Risk. Small-cap mutual funds are very risky. This means that in the short term, investing in them could lead to short-term losses.
Risk. Since the stocks of small caps are prone to market fluctuations, they tend to be affected more during the times when the market is hit – such as during recession – and take time to recover from them. Such market behavior makes the investment in small caps higher risk.
Why small-cap stocks are risky. As small-cap businesses expand, their stocks offer a higher growth potential compared with larger companies. But that comes with a greater risk of volatility — including more (and bigger) fluctuations in stock prices and earnings reports.
If you're just starting out on stock trading, it is a good idea to just stick to large cap stocks for now. This is due to the relatively low amounts of risk that they come with. Also, since they're very liquid, you can buy and sell them quite easily as well.
Part of the reason large-cap stocks are typically less risky investments is because these companies are more established and provide a broader offering of products or services.
Research shows that small-cap stocks have yielded higher returns than large-cap stocks due to their inherent riskiness. Any company with a market capitalization rank beyond 250 is classified as a small-cap company.
Is it better to have a large-cap or small-cap during a recession?
Investing in small caps during recessions has generated superior investment returns, according to our back-testing of the data to the late 1980s (see Table 1, below).
Lower risk: Compared to mid-cap and small-cap funds, large-cap funds invest in well-established companies with larger market capitalizations. These companies tend to be more financially stable and resilient to market fluctuations, offering a lower overall risk profile.
We expect earnings to drive the next leg higher for small caps. According to FTSE Russell, analysts anticipate that expected earnings growth among companies in the Russell 2000 will rebound by 28.2% in 2024, after an expected decline of 11.2% in 2023. The timing depends somewhat on the ultimate path of the US economy.
Given the changing macroeconomic backdrop, we outline why we see potential value for investors in small caps in 2024. The consensus is that interest rates look to have peaked, with markets now pricing in cuts across many major economies in 2024, something which could prove beneficial to small caps.
- ICICI Prudential Mutual Fund.
- SBI Mutual Fund.
- HDFC Mutual Fund.
- Kotak Mutual Fund.
- Aditya Birla Mutual Fund.
- Nippon India Mutual Fund.
- Axis Mutual Fund.
Hence, it is important to have a long-term investment window while investing in Small-Cap Funds so that you give sufficient time to your investment to generate returns. The recommended time frame is eight to ten years.
- Indian Energy Exchange Ltd.
- Central Depository Services (India) Ltd.
- Aptus Value Housing Finance India Limited.
- Five-Star Business Finance Ltd.
- ICICI Securities Ltd.
- Easy Trip Planners Ltd.
- Eris Lifesciences Ltd.
- CE Info Systems Ltd.
Small-cap stocks have a long-term performance advantage over large-cap stocks, and this is often referred to as the small-cap effect. Small-cap stocks are said to be economically sensitive and therefore rally in recoveries and lag heading into recessions.
You could be short on cash when you need it
If you have all your money invested, you may be forced to sell some of your stocks. If they've gone down in value, that will mean selling at a loss. You can put your entire investment portfolio in stocks if you want. The key is not to put literally all your money in stocks.
Yes, small cap stocks tend to lose more ground when the market is falling but they also gain more when it is rising. So, given that stocks go up over time, the gains in small cap over extended periods are generally larger.
What often happens with small-cap stocks?
Small caps are also more susceptible to volatility due to their size. It takes less volume to move prices. It is common for the price of a small-cap stock to fluctuate 5% or more in a single trading day. That is something that many investors simply cannot stomach.
That is: Small-cap stocks have outperformed in prior interest rate cutting periods — and their exposure to higher interest rates wasn't as bad as feared.
The lower liquidity in certain schemes suggests that the they may face challenges in quickly meeting redemption demands in case of adverse market conditions as there may not be many buyers. This is one of the reasons why small caps are under pressure.
If you have a greater risk tolerance and longer time horizons, small-cap stocks tend to outperform big-caps over time because they are able to grow more rapidly than larger companies. If you prefer stable appreciation and dividend income, big-caps may be more suitable.
Investors pay close attention to the performance of smaller stocks because it offers signals about the health of the U.S. economy. Smaller companies typically outperform coming out of a recession. They rallied briefly in late 2020 after Covid-19 vaccines boosted hopes about an economic recovery.
