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3 big advantages of small cap stocks

There's a whole world outside the ASX200.

Jack Derwin

Digital Journalist, Your Money

Editor’s note: This article contains information only. It is not intended as general or personal advice. Your Money recommends seeking professional advice specific to your personal circumstances.

If you own shares, whether it’s through your superannuation or direct, chances are you’re invested in Australia’s biggest companies like BHP Billiton, the major banks, and Telstra.

But if you look outside the ASX200, you’ll likely find plenty of great smaller companies to invest in as well.

“You don’t even have to go way down the list, there are 2,000 stocks out there,” Strawman.com founder Andrew Page told Your Money Live.

There are four good reasons for doing so, he said.

1. Less competition

The fact that most Australians just aren’t investing in these companies can actually be a good reason why you should.

Most people aren’t looking at small caps simply because big investors simply can’t.

“Part of the reason I think is that the big fund managers, the brokers, that’s where they fish… and structurally they kind of have to because they are dealing with a lot of money,”

“Some of these companies there’s just not enough liquidity, ie. there’s not enough shares for them to buy $10 million worth or so,” he said.

That means inflows are much smaller, and prices aren’t driven up as a result.

2. Untapped potential

The other benefit of less competition is that there is plenty of potential to find a diamond in the rough.

“People tend to think that they are hyper-speculative terrible companies. Yes, there are a lot in that group but there are a lot of really established profitable strong balance sheet companies too,” Page said.

“They represent a really good opportunity because all the [professional investors] aren’t there, they’re under-researched so you’ve got more opportunity to find that hidden gem.”

3. Volatility

While the relative size of these small cap companies makes them more vulnerable to larger intraday moves on the sharemarket, that volatility actually presents an opportunity, not a risk for the long-term investor.

“If you’re not short-term trading, volatility is actually a wonderful thing. It’s the same business today as it was yesterday but maybe you’re getting it 8 per cent or 10 per cent cheap on nothing other than the machinations of the market,” Page said.

That’s not to say that there aren’t highly speculative stocks as well, that long-term investors might be wise to avoid, particularly among the mining and biotech spaces.

Watch the full segment with Andrew Page above as he explains what he looks for specifically in a small cap and the ones he is keeping an eye on.

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