Small cap

Small cap shares are those with a comparatively low market capitalisation. Small caps make up the vast majority of listed companies by number but only a small part of the market by market cap.

Small caps offer investors the opposite of blue chips. They are under-researched but doing research oneself is difficult because the information available to investors is not as good.

In general, compared to large caps, disclosure is poor, there is less of an investor relations effort and less careful treatment of price sensitive information. This puts private investors are at an even greater disadvantage with small caps than they are with larger companies.

Institutional investors (apart from specialist small cap funds) tend to pay little attention to small caps, as do the majority of brokers. There is very little sell side research available.

This means that investors who look at small caps do have a good chance of finding opportunities that the market has missed - the market is less likely to be efficient with regard to a small cap share than a large or mid cap.

In addition, there are many growth companies among the small caps. This further increases a small cap investor's chances of out-performing the market. For evidence that small caps do outperform, see size effect.

The downside of this is that there are many people in the business of providing tips on small caps. They are often commented on by tip sheets. It is best to be sceptical of any share tipping service - particularly if dramatic results are claimed. The low liquidity of small caps means that prices are susceptible to manipulation.

Copyright Graeme Pietersz © 2005-2016