What are small caps?
There’s no strict definition of a small cap but this category can be broadly defined as stocks outside the S&P/ASX 100 Index (the biggest 100 ASX-listed stocks based on market capitalisation) but have a market capitalisation of more than $100 million.
Many investors don’t generally consider investing in small caps as their knowledge of these stocks is often very limited. Many small cap stocks are not researched or covered by most online and traditional brokers as they simply don’t have the resources or technology to cover stocks outside of the S&P/ASX 300 Index.
There are a number of tools on the market to help investors identify high performing small cap companies. Both our team and our clients use Stock Doctor to assist them in finding these companies as it allows them to scan all 2000 ASX listed companies and separate the good from the bad in the form of Star Stocks. It also goes a step further and analyses whether the stock is a good fit for your portfolio based on your investing strategy, which should always be considered.
The best small caps to invest in
All companies had their beginnings somewhere and small caps are no different. Identifying the small companies of today that will be industry leaders of tomorrow should be part of your investment strategy.
However, the mere mention of small caps often have some Australian investors conjuring up images of speculative short-term stocks exhibiting poor fundamental qualities.
This couldn’t be further from the truth.
What stops most retail investors investing in these companies is the perceived risk involved in selecting such stocks. Factors such as small or no profit, share price volatility and lack of liquidity in the stock (which makes it difficult to buy or sell shares as there are too few people trading the stock) are off putting.
These concerns are valid but contrary to common belief as there are a good number of small cap companies that exhibit strong fundamentals – such as having a profitable and sustainable business, a strong balance sheet and a good management track record.
Don’t miss out on a potential hidden gem
You can’t afford not to look at small cap stocks. History has shown repeatedly that the sector is without doubt an important piece of any share portfolio and will provide the much needed balance to your investments.
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Lincoln, Lincoln Financial Group Pty Ltd and directors, employees and/or associates of these entities may hold interests in these ASX listed companies. This position is disclosed within the Stock Doctor program and may change at any time without notice.