Small-cap stocks are securities that are tied to companies whose market values often fall between R100m and R10bn. Adding some of them to your investment portfolio could be a good idea, especially if you’re interested in building long-term wealth. And here are five reasons why.
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Higher dividend yields
In today’s market, many investors are seeking yield, so small companies have increased their dividends in order to attract more investors. This combination can give a small cap value fund a significant boost in dividend yields. And higher dividends are a value play.
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Smaller companies are more nimble
In today’s fast paced environment, industries are constantly changing and businesses have to keep up. Large companies struggle to adapt quickly and see past their own systems and methods of thinking.
Whereas smaller companies tend to be more in tune with trends and have the ability to make shifts in their business models to capitalise on these trends. Being able to move quickly gives small companies an edge over their competitors as an industry evolves.
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To trade with a low share price
Buying into a company for only a few cents and then selling for a substantial profit when the price trades back into higher levels. The extremely low prices allow an investor to hold thousands of shares for a relatively small amount of invested capital. With that scale, the gain of just a few cents per share can translate into big percentage returns.
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Growth potential
Compared to their larger counterparts, small-cap companies also tend to be in a better position when it comes to growth. Someone who’s investing in small-cap stocks has a chance to get in on the ground floor before a company explodes in size and its stock value skyrockets.
For investors, there’s no room to go but up, assuming the company you put money into ends up being successful.
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Diversification
It’s important because it allows investors to spread out the amount of risk they’re taking on providing them with some insulation from market volatility. If you’re primarily investing in mutual funds, for example, you could be missing out on the chance to invest in other kinds of assets.
Mutual funds often don’t allow investors to put money into small-cap investments. By investing in small-cap stocks directly, you can create some balance in your portfolio that may not have been there before.
