Sounds contradictory, doesn’t it? On one hand, you are being asked to think big and on the other, you are being told to invest in small cap companies. But if this advice is being given, what is the rationale behind it? First, we’ll learn what small cap companies are and then consider the proposal of investing in them.
Story of Small Cap Companies
In the UK small cap companies in general are those whose market capitalisation lies below £750m. Because of their not-so-large valuation, small cap ventures tend to get the cold shoulder from investors. Analysts also prefer to ignore them and so do major market participants such as banks and mutual, pension and hedge funds. However, on learning of their benefits and historical performance, you may feel prompted to incorporate them into your portfolio.
The fact of the matter is equity markets have not fared badly in the United Kingdom over the last 60 years. Consider this: While £1 invested in UK large caps in 1955 would have fetched you £1255 by 2017, a similar investment in small caps would have yielded £82001. These figures are inclusive of price inflation and reinvestment of dividend payments over the years.
More Reasons to Invest in Small Cap Companies
Small cap companies are considered less liquid than larger listed companies, another reason why investors shy away from investing in them. But what if we tell you that research1 into liquidity has revealed that low liquidity stocks often outshine their high-liquidity counterparts? This may encourage you to invest in small cap companies.
Now, have you ever heard of the term ‘Ten Bagger’? Well, it’s a stock that increases your investment tenfold. Ten Baggers are not a rarity in Small Cap companies compared with their Large Cap counter parts and can achieve even higher multiples. However, you still have to tread with caution and not go overboard as small cap companies are classified as high-risk.
It may seem like a paradox but because they are under analysed, small cap companies can actually let private investors use the price inefficiencies to their advantage.
Here at Clear Capital Markets we will help you to enter this unchartered territory by drawing on our experience and expertise. Besides this, we have several other finance-related products and services to titillate the investor in you.
Clear Capital Markets has even released an exclusive report named ‘Think Big: Investing in Small Cap Companies‘ that will leave you well-informed on the subject in question. To download the report, click the link below:
1 Think Big – Investing in Small Cap Companies by Clear Capital Markets Research
Risk Warning: The value of shares can fall as well as rise; you may not necessarily get back the amount you invested. Past performance is no guarantee of future performance. Clear Capital Markets Limited is authorised and regulated by the Financial Conduct Authority FRN 706689.
This blog post is written by Daniel Pellard, Director at Clear Capital Markets, Senior finance professional with 10+ years experience in a front office environment.
Chartered MCSI, FCA CF30 Registered, Fully RDR Compliant (Valid SPS)
Areas of expertise:
wealth management, portfolio management, HNW private and professional client relationship management, long/short and hedging strategies, risk management, equities, cfds, options, private equity.