Share Prices & Company Research

News

03 August 2022

Think Small

Stock markets are used by many as a real-time bellwether of the health of an economy. We have become so used to the rolling tickers on news channels, giving us either a sense of comfort if the market is up, or dread if it is down. Though, in reality, we are only hearing about the largest 100 companies here in the UK and often are only told about 30 of the largest in the US. Yet, between these two markets, there are over 6,000 companies listed, so what about the rest?
 
It’s an underserved majority of the investment universe that many overlook when dipping their toe in buying stocks, yet it’s often a source of great financial returns (see: Small & Mid-Cap Stocks The Key to Long-Term Returns?). Small and mid-cap companies are aptly named for their market capitalisation (aka market value) and are a little-known hunting ground for savvy stock pickers, looking for an edge over the normal return profile of blue-chip companies. They are less mature and often give an opportunity to get in early before they enter their growth phase.
 
Further benefits can be reaped from smaller company investing. AIM, the London Stock Exchange’s market for small and medium cap companies, offers its investors business relief on qualifying shares, meaning investors can shield their wealth from inheritance tax (see: Scoping AIM). There’s also plenty of exciting opportunities to invest in, which are certainly not unknown. Jet2, Fevertree and Boohoo all offer compelling investment cases that could save you tax too.
 
Although most stocks in this sphere are real-life companies with operational assets, it is a good hunting ground for investment trusts (investment funds under the guise of a listed company). One asset class that often uses this structure is Private Equity, which was the theme of our Winter edition of 1875. The nature of a company structure lends itself to packaging up a diverse private equity strategy (see: The HG Capital Trust: Small & Mid-Cap Private Market Resilience), while allowing the fund to run like a company and set up consultancy support to the businesses they invest in. In other words, running the fund much like a parent company, without meddling in the strategy of your businesses!
 
As with anything, these are not easy pickings; best left to an experienced manager with a diverse strategy. Small cap companies can be fruitful, but risky, requiring more careful due diligence before committing any capital. Mostly under the radar, these companies will often come with the baggage of more thorny nuances in their accounting, and it can be hard to find key information or research. What’s more, they rely heavily on capital, and it may take some time before you see your investment grow. A bit of patience, diversification and careful stock selection should give ample rewards over the long term.
 
This article was taken from the May 2022 issue of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
 
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
 
Think Small

More News Stories

Market Round Up
12 August 2022
Deere & Co
10 August 2022
Market Round Up
02 August 2022
SUBSCRIBE TO OUR PUBLICATIONS
We offer complimentary investment publications produced by our in-house Investment Research team. Please click here to view our range.