Investing in Small Caps

Guide: Advanced Trading

Why Small Caps are important

Every cloud has a silver lining, and for those investors who survived the holocaust of the dotcom and TMT boom-and-bust the upside is that they have become wiser and more accomplished investors. And all the signs are that they are also more ambitious and are prepared to seek out companies with real potential rather than sticking to the safety of the FTSE 100.

Evidence for this entrepreneurial flair that has infused investors came from figures published for 2003 trading activities. Here in the UK money flowed into the market and the FTSE 100, which measures the performance of the top 100 companies, rose 16.7 per cent. That's a pretty impressive figure until it is compared against the FTSE Small Cap Index, which went up a whopping 57 per cent.

And the statistical picture was pretty much the same around the world. The smaller companies were the darlings of the stock market as far as private investors were concerned.

Interestingly, the change of heart came in the second half of 2003. Whereas at the start of the year investors were demonstrably risk averse by autumn there was a move toward more volatile and cyclical stocks in the autumn. Indications are that the trend has continued.

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