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Small stocks, big losses

Retail investors should limit exposure

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stock markets | Retail investors | Business Standard Editorial Comment

Business Standard Editorial Comment  |  Mumbai 

Sell-off continues across global equity markets. As always during downturns, the mid-caps and small-caps have suffered more price erosion than large-caps. While the Nifty has lost 11 per cent since January, the mid-cap index has shed 14.5 per cent and the small-cap index 19 per cent. In terms of valuation, the market is trading at a price-to-earning (PE) of 19-20, but roughly two-thirds of the stocks in the broad NSE500 have lost over 30 per cent. There are several reasons why small-caps and mid-caps are inherently more volatile. One is that in fundamental terms, the larger a firm, the more likely that it has sufficient resources to weather a serious downturn. Another reason is simply that institutions have lower stakes in smaller stocks. Institutional investors are more capable of pursuing a “buy and hold” strategy to wait out cyclical downturns. This brings us to the corollary — have larger holdings in mid-caps and small-caps and they tend to suffer larger capital losses, and to indulge in bursts of panic selling during downturns.

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First Published: Tue, June 28 2022. 00:35 IST
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