Small Value Stocks Defined

Last Updated: 28 Feb 2024

One can divide stocks based on market capitalisation, which is the total value of a company’s equities, into small-cap , midcap and large-cap stocks.

The small-cap stocks belong to companies with lower market capitalisations. Investors also call these stocks value stocks based on their valuation strategy.

These are the stocks of companies that have value and a lower capitalisation. By looking for “small value stocks India”, one can get many examples of companies falling under this category.

This blog will discuss the meaning of small value stocks and the advantages and risks involved in value stocks investing.

What are small value stocks?

According to the three-factor model by Fama and French, the small value stocks definition possesses two key features: value and small-cap size. These stocks are usually trading below their book value and have a lower market capitalisation.

These stock are called value stocks because they tend to trade relatively lower than their valuation and might gain a higher capitalization in the near future.

These stocks can be considered unicorns in the investment space, which are rare for investors to find. Another reason why small value stocks are called value stocks is that they are undervalued and possess high growth potential.

What are the benefits of investing in small value stocks?

The precise definition of “what is small value stocks” is “small value” of stocks that have the potential for higher growth.

These are the benefits of investing in small value stocks:

• Higher growth potential than higher valuation stocks
• Undervalued stocks are often priced at a lower level
• Smaller floating shares (number of shares available for trading)
• Strong fundamentals can lead to stable growth and profitability of a business
• They are like the newer brands that have a lower production scale and are on heavy discounts.

What are the risks involved in small value stocks investing?

Here are the risks investors might face while investing in small value stocks:

• They might not be able to withstand short-term high market volatility.
• Unreasonably positive expectations without considering the fundamentals might lead to biased investing.
• There is a greater risk of failure in these businesses as they have lower valuations.
• Investors might mis-assess value in terms of the margin of safety and cash flows.
• An investor might also get frustrated if they find no value and act impatiently.
• There might be a misinterpretation of stock value and the investor might overpay to buy a small value stock.

Falling prey to these risks is also known as falling into “value traps”.

Investing can give expected returns if it is bias-free and based on research using Stock trading app. Small value stocks have a higher growth potential than other stocks. However, investors must also be careful about the risks involved while investing in small-value stocks. Investors can face risks such as mis-assessment of value, higher volatility, over-paying to buy, risk of failure, and impatience while investing in these stocks. A research-based and bias-free investing in fundamentally strong small value stocks is required.