| The chaos in the equity market has left the
investors perplexed. With a lot of variety to choose from it becomes
increasingly difficult to make a correct choice. Investors need to
know the differences and the risks involved in mid-cap stocks, small-cap
stocks and penny stocks. There is no one or a common definition that
will fit a particular category of scrips because the classification
parameters differ for each entity that is undertaking the classification.
Thus, what is mid-cap for an analyst with a broking firm will differ
from that of a mutual fund manager and so on. A
mid cap stock is the one which does not fall in the list of top
companies. One of the easiest ways to identify them is to look at
the net investment or market capitalization of a company. Another
way of calculation is to exclude 750-1000 companies based on market
capitalization and then remove a particular percentage of the top
companies. This will give you your mid cap segment.
Small cap companies are those that come after the
mid cap companies on the market cap rankings. The small cap companies
have low market cap, which is generally below Rs 100 crore. However
these are different from penny stocks.
What do you think penny stocks are? These are the companies that
have a market price that is less than the par value, which means
that it generally quotes for a few rupees. Penny stocks costs the
least ranging within a few rupees. The risk of losses increases
with these stocks. Along with low price they also have low volumes.
When dealing with such stocks it is necessary to make a careful
study of the market. Further there is quite a bit of speculation
in such stocks resulting in sharp movements. Often, volumes fluctuate
resulting in these stocks becoming illiquid when market conditions
become tough.
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