Stocks can be categorized in different ways. One of the most common ways to classify them is by market capitalization. Proper diversification allows investors to own a mix of different sized stocks.
If you are hoping to make decent returns from stocks then small cap investment may be perfect for you. Small cap companies can be a solid investment because of their propensity to grow. While these are also labelled as risky options, but with risk comes reward. However, it is important to have a strategy and use small-cap stocks in your portfolio smartly.
Based on size, stocks can be classified as small, mid, and large cap. While market cap is a convenient way to classify listed stocks, it may not provide an actual measure of the quality or prospects of a business. The technological advancements like cloud computing, electric vehicle manufacturing, and artificial intelligence allow small-cap companies to innovate and reach new customers.
1. Diversification
Small caps give you the opportunity to invest in growing companies with higher growth potential. Though these stocks bear risks such as higher volatility, they also provide diversification benefits and long-term returns. Don’t put all in your money in any one category of stocks. Create a balance between large, mid and small caps. This helps reduce risk.
2. Invest for Long Term
Small cap stocks face much larger volatility in terms of price as well as revenues. Investing for the long time is the key to ride out the volatility. You can decide the time to allocate to small, mid and large cap stocks depending on your risk tolerance and investment goals.
3. Start Small
If you are beginner, start by investing a small portion of your portfolio in small cap stocks. Once you learn more you can increase your investment. Starting small also allows you to make informed decisions as these stocks can be highly volatile.
4. Focus on Growth Potential
Before investing, learn about the company. Check their business model, industry trends, and financial health. Well-researched investments reduce your risk. Small caps have a lot of room to grow. The stock prices can increase significantly, giving you higher returns over time.
5. Watch for market Trends
Small caps can be sensitive to shifts in the economy. Keeping an eye on economic changes to track your investment. It will also allow you to re balance your portfolio and making changes overtime. Your goals may also shift over time. You can also re balance your portfolio and focus on mid cap stocks in Canada also along with small cap stocks.
6. Re balance Your Portfolio
While small cap stocks can be volatile, re balancing allows you to manage the risk. Depending on market conditions, you can reduce exposure or add more for growth during favourable conditions.
Using small cap wisely in your portfolio is the key to benefit from the growth potential of these stocks. They have more growth potential than mid and large caps. To manage the risk that come with returns, you need to balance your portfolio with large, mid and small-caps.
Above all always consult with a financial professional before investing or creating a portfolio. Always conduct a proper due diligence process when choosing investment products or equities.
