Investment Guides 

Investing in small caps

Investing in small caps

Introduction

Size matters in the stock markets. If you invest in mega-caps – the biggest listed companies of them all – you will expect to get safe, if slow and steady, returns. Mega-caps' shares are liquid too: easy to buy and sell. At the other end of the spectrum lie the smallest listed companies: small caps. These offer the potential for incredible growth. In this guide we take a closer look at small companies and explain why you might want to include some in your portfolio and how to go about making the selections.

Defining a small-cap stock in not an exact science. Indeed, many larger fund managers consider anything valued at less than £1bn as small-cap, and certainly most consider companies valued at less than £500m to be small. Helpfully, there are a number of different equity markets which are home to predominantly small-cap stocks. In the UK this includes the FTSE SmallCap Index, FTSE Fledgling Index and the Alternative Investment Market (Aim).

Below these markets there are also a plethora of different trading exchanges that are home to small- and micro-cap companies such as PLUS Markets, GXG Markets and ShareMark, but these tend to be home to very small and early-stage companies, or more established companies which do not need a full quote, but do require a dealing facility for their shares.

Below this there are even investment schemes that allow investors to get in at the seed capital stage of a business development, although the risks are quite significant at this point.

Thus, we generally consider any company whose shares are traded on one of the three main small-cap indices as a small-cap. This can appear erroneous when Aim is home to companies such as Asos, which is valued at more than £1bn. But such companies are exceptions and these indices are home to literally thousands of small companies, offering investors a wealth of investment opportunities across a huge range of industries and geographies.

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