More and more people are becoming financially aware these days. They are more inclined towards investing their money. Some of the most common options for investing include fixed deposits (FDs), mutual funds, real estate, and the stock market. Nowadays, a lot of people are investing in stocks because they give out higher returns. People give a lot of importance to small-cap stocks. In 2023, the Nifty Small Cap 250 Index gave an excellent return of 46 percent. As a result, investors are expecting huge returns in 2024 as well. It is important to note that investments in small-cap stocks should be done after thorough research, as they are quite volatile. So, let’s look at some things that should be avoided while investing in small-cap stocks:
Do not be hasty while buying and selling: Stock market experts have given three golden tips for investing in small caps. First, choose the right time. Secondly, give the stock adequate opportunity to grow, and thirdly, manage risk for seasonal fluctuations. Sham Chandak of Elios Financial Services has revealed that the performance of small-cap stocks is seasonal and not perennial. As a result, investors should choose the stocks to invest in, depending on their company’s performance in that season.
Do not consider PE as a precise formula for evaluation: Most investors consider the price evaluation (PE) ratio to be the most accurate formula to determine the valuation of a company. This is difficult to follow for small-cap shares. Many times, it happens that there are not many companies to compare the stock with. In such a situation, relying on PE can sometimes be deceiving. Financial advisors have suggested that investors should focus on the long-term growth prospects of the stock. Apart from that, they should also consider parameters like the margin performance of the stock and the return on capital employed.
Do not ignore the advice of big investors: Financial advisors say that investors should not ignore the advice of big investors. This is because they have more financial information about the company, and they can also contact the management directly. Apart from that, it is also suggested that if a big investor has not invested in a small-cap stock, then there must be some reason behind it, and investors should be cautious about such shares.
Do not buy stocks without research: Financial advisors have also suggested that people should always do proper research before investing. They should read the annual reports of the companies for at least two years. Apart from that, investors should also gather information about the company’s business model, revenue sources, competitors, and management.
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