Investing in Small Caps

Guide: Advanced Trading

What are Small Caps

Small Cap is a catch-all phrase to cover a wide variety of the smaller quoted companies (SQCs).

In stock market terms the size of a company is usually measured by its market capitalisation. To get to this figure you take the number of shares in issue and multiply it by the current price of each share. It is a sensible way to calculate the size of a company and it is used by markets around the world. However, defining which companies fall under the heading of 'Small Cap' differs from country to country.

In the United States it is generally agreed that Small Cap means a company with a market capitalisation below $500 million. Here it is much more complicated than that. There are 700 companies with a market cap of over £56m quoted on the main market of the London Stock Exchange (give or take a few, the picture can change from day to day). The top 100 by market cap form the FTSE 100 and the next 250 companies in the league table are the FTSE 250. Collectively they form the FTSE 350 and the remainder of the quoted companies with a market cap over £56m form the FTSE Small Cap Index.

But when we are looking at UK smaller companies we must include those on the Alternative Investment Market (AIM) and OFEX, which is the other British exchange for SQCs. (These are probably the most well-stocked fishing grounds for those seeking younger companies with exciting plans and good growth prospects.)

The whole indices scene can be rather confusing and in fact it has been designed principally for stock markets to measure performance rather than to help the private investor. Our advice is to forget the confines of the indices. Set your own parameters, for example companies with a market cap of between £10m and £200m and mine for gold nuggets in all the markets that contain such constituents.

Top of Page