Mid-cap and Small-cap stocks are very volatile and go up and down sharply. They are the first ones to crash when things go wrong in the stock market. So you need to understand the fact that you’re in for some risk and you need not feel down if you see your money down by a big margin if by chance markets crash. However, it markets are on a bull run, then these small stocks rally like anything thus maximizing your gains. So if you are looking to invest into mid-cap and small-cap stocks, then have a look at 3 rules below : –
This is the first step towards investing into these small companies. You need to first make a list of all good small and mid stocks that are expected to do good in the current year. If a stock is not supposed to give good growth this coming year, then it is NOT the best investment you can do now. So look for only companies that are expected to post strong set of numbers this year. It does not matter which sector the stock belongs do, the earnings outlook should be good that’s it.
Shortlist Attractive Valuation Stocks
Now that you have a list of a lot of good stocks, you are going to shortlist the stocks as per their valuations. Some stocks might be trading at a high valuation and some must be trading at a very low valuation. High valued stocks are a big NO! Low valued stocks are the way to go, if you notice, most low valued stocks have been corrected and thus they look attractive. For example, I can say that I found a small cap company that is expected to grow at 30% in the current financial year and right now the stock has been hammered 15% from it’s highs and is trading at a P/E of 5 as per previous financial earnings. So that is attractive and forms a buy.
Don’t put all your eggs in one basket
One of the most common phrase which is extremely important when investing into these smaller companies. A lot of times it happens that the companies don’t get value it deserves from the market and thus you cannot put all money in a couple of companies and miss out on the returns which you could have got by diversifying into a lot of stocks. This is not entirely the case with large-caps but with small-caps, it is. Sometimes there are stocks that give really good results but still don’t move up. So the best case is diversifying into several such good stocks and minimizing the downside risk to returns. For example if you are investing 1 lakh rupees, I’ll say invest into 10 such stocks by putting 10,000 each. If one or two don’t move at least the others will since you don’t know which are those selective stocks that will fail to attract attention from large investors. So it is best you diversify among various such small stocks.
Mid-caps and Small-caps make you the most money but can also erode most of your money, so be careful and only enter into quality stocks that are looking good. Stay away from bad fundamental stocks as they are in the best position to erode your money.