Do small-caps deserve a place in your portfolio?

Julie Brownlee, Fsp Invest, 19 Mar. 2014

Tags: small-caps, penny shares, penny stocks, why invest in small-caps, risk, profit, stocks, shares, stock market, large-caps, portfolio, investment portfolio, investing, investors

Some investors may shy away from small-cap shares. They believe they’re too risky to invest in. They’d rather keep their money in blue-chip shares instead. But if you want to make money in the stock market, small-caps should form part of your portfolio. Let’s take a closer look at why you should include some small-caps in your investment portfolio…

Small-caps (or penny shares) can outperform large-caps over the long-term, Marc Lichtenfeld in Investment U explains…

But are small-caps not too risky to invest in?

If you look at small-cap shares individually, they can be more speculative than your average JSE Top 40 share. But small-caps have the advantage of higher growth potential ahead of them. You simply don’t have the potential with a large-cap share.

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What to look for in small-caps

But before you commit any money, it’s crucial that you do your research before you invest. You want to look for shares that are responding well when certain events happen within the company.

Ideally you want to find companies that are doing this under the radar. This can give you the chance to catch the market off guard. And this can translate into bigger profits.

But be careful, sometimes there are very valid reasons why a small-cap isn’t doing well. And you need to try and avoid these shares if you can. You need to conduct thorough research.

You want to try and find small-caps that are showing a hint of good performance. Such as reacting well to important news from the company.

By looking for major catalysts in out-of-favour companies, you’ll increase your chances of finding a potential winner. This means less risk and larger gains.

By taking the time to find some decent small-caps to invest in, you can boost the performance of your portfolio at the same time.

So there you have it, why small-caps deserve a place in your portfolio.


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