Small Cap Stock Investing

Small Cap Stock Investing

Small Cap stock investing can be risky but the rewards can be high. A balanced portfolio should include a range of investments including small cap stocks.

Stock Markets are not just about the FTSE100 or the Dow even though these grab the headlines for overall stock market performance. The biggest stocks may rise in any upturn but that is equally true of mid-cap and small-cap stocks. Small cap stocks can rise, and rise much faster when big cap stocks are under performing.

Investors should seek to diversify their portfolios and expose themselves to the greater risk and growth potential of smaller cap stocks.

During a period of equities rising a portfolio including mid-cap and small-cap stocks will be beneficial as they tend to be geared towards market recoveries. Since the beginning of 2009 the FTSE100 has risen by 6% whereas the broader FTSE250 has risen by 28% as it includes companies with a smaller market capitalisation.

Indeed, a portfolio containing only companies in the FTSE100 would be heavily weighted towards Utilities (Oil & Gas) and the financial services (Banks & Insurance). Whilst shares in companies like Shell or BAT will rise in any upturn they are unlikely to double in the near future.

Following a major index may mean less risk as the market is, by definition, more liquid but rapid growth is likely to be tempered.

Larger cap stocks are much less cyclical than mid or small cap stocks which can be attractive in a slowing global economic environment but the highest returns rarely come from well known stocks.

Over the longer term you may find better value and return by moving down the cap scale due to market inefficiency and that’s where small cap stock investing comes into it’s own.