Investing in smaller companies

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5. No single method

Small caps represent a particular tier of the stock market, and within that tier are companies operating in all industry sectors.

Just as there are numerous ways of investing in the stock market as a whole, there are numerous ways of investing in small caps, of which the following are just a few:

• value approach: You may consider buying companies that are undervalued by assets, earnings, or yield

• growth approach: buy companies whose earnings are growing 15% p.a. on a modest P/E

• technical analysis: examine the share price patterns and look for 'signals' that indicate a trend

• cyclical: buy companies that are at the bottom of an industry cycle

• turnarounds: you may consider buying companies that have hit the depths and are just about to bounce back

• shells: buy companies that have just had an infusion of new management as a precursor to a change of business direction

Seasoned small cap investors take the view that no one system works all the time, and that to invest successfully you need a pragmatic approach that borrows skills and techniques from all the systems. Above all, a small cap investor needs to rely on common sense judgements about businesses and the price being paid for a share in them.

1. What is a small cap? 2. The arguments in favour of smaller companies 3. The arguments against smaller companies 4. The aim of investing in smaller companies 5. No single method 6. Is it a good business? 7. Can you buy at a reasonable price? 8. Penny shares and other speculative stocks 9. A note about tax 10. Other tips 11. Conclusion