7/19/2023 0 Comments Sector 9 steam roller![]() ![]() Standard deviation can also be used to measure Sharpe ratio (a measure to gauge risk-adjusted performance). The standard deviation of Micro cap index is close to 22 compared to 18 for Nifty 50. Micro caps’ better performance is because they take more risk than other indices. Risk: The performance of indices should be looked at from a risk-adjusted perspective. In other words, investors that can stomach a loss of 70% on their investments can qualify to indulge in these investments. The maximum drawdown for Nifty 50 during the last five years is 38% while that of micro caps is nearly 70%. However, the real test comes in bear markets where stock prices collapse and may experience serious drawdowns (measured as the extent of fall from peak to trough). In a bull market (like the one now), almost all stocks (good, bad and ugly) tend to move up in price. Performance: As noted in the beginning, micro-cap performance was stellar compared to Nifty 50 during the current year. Micro cap companies normally score weakly on all these parameters. Corporate governance is a qualitative parameter that includes the board’s strength, ability to communicate proactively and following ethical practice with stakeholders including tax payments. Weak corporate governance can also encourage insider trading where people with inside knowledge can participate in price manipulation process. ![]() To start with, high promoter holdings in micro caps can open up opportunities for coordinated price manipulation with a motive to “pump and dump” (also called as circular trading). Absence of research reports will mean extensive due diligence on micro-cap stocks which can again be costly.Ĭorporate Governance: This is the biggest hurdle and can come in many forms. While research opinions (especially sell-side brokerage reports) cannot be completely trusted, at least there is someone ready to provide some opinion about a company analyzing the future potential of the business in which the stock is involved. ![]() Research Coverage: Large caps and to an extent mid-caps enjoy some sort of research coverage by analysts (both buy-side and sell-side). ![]() The higher bid-ask spread pushes up the cost of acquisition for micro caps. The downside of this extremely small liquidity is the higher bid-ask spread, essentially a measure to see the difference between bid price (price to buy) and ask price (price to sell). The ADTV of Nifty 50 is about USD 61 billion while that of Micro caps is just USD 1 billon. Liquidity: The most important limitation of the small size of penny stocks is directly reflected in the liquidity as measured by Average Daily Traded Value (ADTV). The universe of micro caps is just too small and this opens up other problems as well. A better measure would be median market cap which stands at USD 11.5 billion for Nifty 50 while that of Nifty micro cap index is just USD 103 million (0.9%). The average free-float market cap for Nifty 50 is USD 42 billion while that of Micro caps is only USD 125 million (0.3%). While the Nifty 50 market cap (free float) is over USD 1 trillion, the micro-cap market capitalization is just USD 31 billion, hardly 3%. Size is usually measured in terms of market capitalization. Size: Penny stocks or micro caps represent the lowest end of the spectrum in terms of size. Let us examine the attributes for a better appreciation of the problem. A review of statistics reveal the sharp contrast that one should observe before deciding to jump in this opportunity. The Nifty 250 micro-cap index represents stocks that are ever smaller than small cap stocks and this is our focus in this article. The next layer of 250 stocks are grouped as Nifty 250 small cap stocks. The next 250 stocks are grouped under Nifty 150, labelled as micro cap stocks. However, the largest of them is grouped under Nifty 50 (comprising the top 50 stocks) and Nifty 100 (comprising the top 100 stocks) representing large cap stocks. From approximately 900 stocks back in 2006, the universe of stocks has expanded to more than 1,600 stocks now offering plenty of scope for stock picking. The main stock exchange i.e., National Stock Exchange (NSE) has seen robust increase in the number of stocks listed over the period. The attractiveness of an asset class should be examined from various factors as outlined in the table. ![]()
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