Small-Cap Stocks

How big is a big company? $100 billion? $10 billion? $1 billion? All of those figures would constitute big companies in our mind. And when you look at the list of companies on the ASX, there are loads of companies worth over $1 billion.

In fact, most of the total market cap of the ASX is made up of billion-dollar companies. You know many of them because they’re household names. Companies you hear about on the news, like BHP Billiton, Telstra, the Commonwealth Bank, Carsales, Woolworths, Wesfarmers…the list is long.

These big companies are fine for most investors. And, in a good year, they can see strong gains, sometimes double-digit gains, like 20% or 30%. That’s fine, but what the average investor doesn’t realise is that the most exciting, interesting and world-leading companies actually aren’t worth that much money.

The Best ASX Stocks Are Small Cap Stocks

In fact, if you look at companies on the ASX worth less than $500 million, you’ll find some of the most exciting stocks in the world. These small-cap stocks are full of huge potential. Some of these stocks can see price rises in excess of 100%, 200%, 500%, and sometimes even more than 1,000%.

This is possible because small-cap stocks can make one big deal, sign one crucial agreement, surprise the market with one big announcement, and see the value of their company skyrocket virtually overnight.

That could turn a stock worth a few cents into one worth a few dollars in a short space of time. And it could supercharge an investment portfolio in a way that almost no large company can.

Small-cap stocks can be risky

Of course, when investing in small-cap stocks, the risks are higher too. They can have big price swings on a daily basis. And we never suggest investing all your money in this part of the stock market — it’s too risky.

Just a small investment in small-cap stocks could pay off massively. That’s the risk/reward payoff here. A small stake down in a small-cap company could still potentially return more than a large stake down in a large cap company. And that’s what makes small-cap stocks so exciting.

In fact, we think it’s the most exciting part of the market, with the most potential. And every investor should have some exposure to small-cap stocks as part of their investment portfolio.

Money Morning Australia