Investing in smaller companies

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1. What is a small cap?

It depends who you ask.

There's a general consensus that the yardstick is market capitalisation, but as for the figure - take your pick from £50 million, £100 million or £500 million.

Of course, market capitalisation is a moveable feast. If an AIM company is recommended in the Sunday newspapers, and its shares rise 30%, its market cap might leap from one side of the threshold figure to the other. Overnight it could turn from a small cap to a mid cap, even though its sales and earnings are the same.

Some commentators argue that market cap just isn't a very good measure of whether a company is big or small. An internet company might have a £500m market cap, but if it has sales of £193,000 and makes a thumping loss, can it really be described as a large company?

Perhaps a better way of identifying a small cap is to leapfrog the whole question of market cap, and concentrate instead on the features that attach to this sort of company. They are:

• lack of research
• wide bid-offer spreads
• poor liquidity

That's a pretty negative way of looking at small caps, but has the advantage of being realistic.

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

• Investor's Guide To Selecting Shares that Perform