One of the longest running investing debates is about the pros & cons of investing in small stocks versus large stocks. Should you pay a premium for a stock with a large market capitalisation or should you go for cheap small-cap stocks?
Logic can be marshalled on both sides of the fence.The arguement in favour of investing in small caps is simple. A small business can grow quicker because of the small base & therefore , returns are higher. As businesses grow larger their growth rate could slow down.
A classic example is INFOSYS. The software biggie doubled its turnover & profits every year for the first eight years after listing in 1993.
in 2006-7 , it achieved Rs13,149 crore turnover & although its revenues rose by Rs 4121 crore, the growth rate was 45%- impressive but slower than in the past.
So growth prospects are in favour of small stocks. But the argument in favour of a big- stock focus also deserve to be heard.
A big business is less vulnerable to crisis like the loss of a big client. It has a proven track record & due to institutional interest, corporate governance is likely to be better.Institutional holding also lends support to the price of large-cap stocks- institutions don’t sell stocks in a hurry.