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Investing in smaller companies

Introduction| Course| Q&As | Recommended reading| Quiz | 279

3. The arguments against smaller companies

Detractors of small cap investing argue that:

1. The dominance of institutional money in stock markets, and their preference for larger companies, means that there is less money chasing small caps, so their share prices often under-perform the market as a whole.

2. Small company shares tend to be volatile. In the late 1990s before the stampede for tech stocks, small caps were out of favour. In 1999 and early 2000 sentiment swung the other way, with FTSE 100 shares in the doldrums, and the shares of popular small companies trading at high P/Es. Then, just as violently, sentiment turned against small caps in mid 2000. This type of rollercoaster ride is risky and can be unnerving.

3. The globalisation of the world economy means that big companies have a fundamental advantage over small ones. This is true for brand-dominated industries but not necessarily true for 'intelligent' industries like high technology, or for people-based businesses, where small companies can still outmanoeuvre large ones.

4. In recessionary times, small stocks are always penalised heavily.

5. Small caps have poor liquidity. Simply put, this means that it can be hard to sell your shares when you want to, and that the bid/offer spread can be wide. With large companies, there is always a ready market.

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

Recommend Reading

• Investor's Guide To Selecting Shares that Perform

 

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