Stock market today: The Indian stock market fell into negative territory during Monday's trade, following a sharp recovery on Friday. While all of the major indices are trading in the red, the major benchmark indices lost less than the small- and mid-cap indices. During the intraday trade, the small-cap index shed more than 1000 points, giving it the worst beating possible. The small-cap index saw a weaker opening today and reached an intraday low of ₹44,476—roughly 1175 points below its closing Friday of 45,650.

Stock market experts stated that profit-booking in the small-cap group was overdue and that the stocks were trading at considerably higher valuations compared to their fair prices. In addition, the small-cap index was further dragged down by profit-booking taking a bigger hit in PSU, banking, defense, power, and railway companies. For small-cap and mid-cap companies, execution would be crucial, and a little decline in their earnings could further encourage market participants to sell their shares in these companies.

Why is the small-cap index plummeting?

Manish Chowdhury, Head of Research at BP Equities, explained why investors are punishing small-cap firms so harshly in the stock market: "There has been a correction in the mid and small-cap space as valuations looked stretched in select pockets." PSU stocks, particularly those in the power, railroads, defence, and PSB sectors, have seen a significant decline, and it appears that these companies have reached their near-term peak. We felt that these stocks had outperformed their fundamentals. Given their premium valuation in comparison to historical benchmarks, we think that execution will be a crucial factor for mid- and small-cap firms moving forward, as even a little miss on the earnings front might result in significant market punishment."

Top 5 causes of the small-cap index decline:

Stock market participants picked the following top five explanations as the main causes of the small-cap index's steep decline:

1] Profit-booking following significant Gains: According to Amit Goel, Co-Founder & Chief Global Strategist at Pace 360, "after a period of strong performance, investors might be selling small-cap stocks to lock in profits and look for more stable investments."

2] Overpriced in comparison to other Equivalents: According to Amit Goel, "small-cap stocks are overvalued compared to their larger counterparts, leading to a correction in the index."

3] Middle East Crisis: "Investors typically prefer large-cap firms over small-cap corporations during times of economic instability or geopolitical concerns. Selling pressure in the small-cap category may result from this shift in mood, according to Amit Goel.

4] Less Liquid Nature: According to Amid Goel, "small-cap stocks are generally less liquid than large-cap stocks, which can make them more volatile and susceptible to sudden price swings."

5] Sell-off in defense, banking, railway, and PSU stocks: "Sell-off stress was already present in a number of small-cap defense, railway, banking, and PSU equities. Profit-booking ensued in these segments when the Nifty 50 index repeatedly failed to break over the 22,000 barrier, which stole in other segments as well. The aforementioned segments have now prolonged their bear run, which has exacerbated selling throughout the small-cap index, according to Profitmart Securities Head of Research Avinash Gorakshkar.