While the stock market is ruled by giants like Reliance Industries, TCS, HDFC Bank, ITC, etc., small companies often make big money for investors, albeit with some risk. Some of these stocks are called microcaps and penny stocks. Ask investors and most will tell you that microcaps and penny stocks are one and the same. However, this is a misconception which even the experienced investors have. While many microcaps are penny stocks, that's not the case for all such shares. In this article, we explain how microcaps are different from penny stocks.
The difference between penny stocks and microcaps
Penny stocks are generally stocks that have really low prices, often as low as less than ₹20 per share. They have small market capitalisation and are thinly traded as investments in these shares come with speculation and high risk.
Microcaps, on the other hand, are 250 largest stocks following the Nifty 500 index constituents (selected based on their average full market capitalisation), as per NSE. These stocks do not necessarily have very low prices. In fact, some microcaps have prices as high as over ₹3,000 per share. Examples of such microcaps are Force Motors ( ₹3,468.70), Neuland Laboratories ( ₹3,740.00), and HIL ( ₹3,028) (as of Sept 6, 2023). Among the low priced microcaps are GTL Infra ( ₹0.75), Rattan Power ( ₹6.65), Jaiprakash Power ( ₹8.60), and Dish TV ( ₹21.20).
As of 30th June, 2023, the largest microcap company had mcap of around ₹11,000 crore and the smallest company had an mcap of around ₹1,000 crore in the current composition of Nifty Microcap 250. The median size of microcap is around ₹2,500 crore.
Should one invest in penny stocks?
Penny stocks trade at very low prices. Some penny stocks, also known as ultra penny stocks, trade around Re 1. While they are highly illiquid stocks of companies that may be facing crisis, investing in them can lead to substantial returns if the company's fortune turns and the stock becomes a multibagger. However, since there is limited coverage on these stocks, experts advise not investing in these companies if one's risk tolerance is low.
Should one invest in microcaps?
While microcaps are considered inherently risky and their earnings are volatile, there is a substantial portion of companies that are profitable. As of 31 March, 2023, out of the 250 microcap companies, 218 are profitable. In fact, several microcaps have achieved impressive transformations over a period of time. Since 2005, around 106 companies turned into smallcaps, 27 turned into midcaps and 2 turning into largecaps.
However, as mentioned earlier, investing in microcaps comes with high risk as often there is very limited information available in the public domain about these companies to gauge the outlook. While some companies successfully become bigger, others may face crisis and fail. Experts advise not investing in these companies if your risk tolerance is low.
Disclaimer: This article is for information purpose only. We advise investors to check with certified experts before making any investment decisions.