When you hear the term investing, our minds naturally wander to the glitz and glamour of investing in large multi-national companies who turnover millions year on year.
While there is a distinct area of the market for this form of investing, investors throughout the UK are often unaware of the fantastic benefits of investing in small companies.
For those who are reading this trying to work who they would be investing in, the Companies Act 2006 defines a small company as a business where the turnover is that £6.5 million and there are no more than 50 employees. While there are variations in how different organisation define what a small company is, everyone is in agreement that investors can and should take advantage of these fantastic investment opportunities.
What are the benefits of investing in small companies?
Investing in small companies provide investors with a distinct set of benefits they often can’t access when they invest in larger blue-chip firms.
Growth opportunities
Investing in large companies most certainly provide investors with the potential for significant returns, but their room for substantial growth is limited naturally due to their size.
Most successful large companies will have started as a small business at some point along their journey. Small companies provide investors with a chance to enter at the beginning or the very early stages. While investors will naturally be searching for the next Apple or Netflix, younger firms who are bringing new products or services to the market provide investors with the chance to jump on board with a new trend or a new market.
As small companies are just businesses with a lower total value, small or young companies can grow in ways and rates that large companies can simply not achieve.
Continued dividend growth
Due to the nature of investment in today’s financial market, investors can reap the benefits of increasing dividend payments. Small companies provide investors with a distinctly unique opportunity as the company or companies continues to grow into a mature business. Dividend payments are a fantastic measure of a company’s growth or success. As companies continue to grow, investors will see increased dividend payments year on year in return for continued investment.
Access to companies.
One of the greatest issues facing investors today is the saturated market of the investment market. The small-investment market, however, is less crowded as many investors and institutions look to invest in established companies with proven returns rather than small businesses.
As large mutual funds tend to stay away from small-cap investments due to the regulations attached to investments, individual investors who can spot promising companies or investments can get in before institutional investors or large. When large investment players enter the market, they tend to do so in a big way, subsequently pushing up the price.
Challenges
While the benefits of investing in small companies are significant, there are still challenges attached to this form of investment. While most of these are common across the investing world, every investor must be aware of these
Risk
There is no denying that every form of investment has some form of risk attached to it, and this is most certainly the case with investing in small companies. While investing in large multi-national or blue-chip companies is relatively protected due to the established value of the firm, a large proportion of small-companies valuation is based on their future growth. For an investor to receive a continued return on their investment, the company they have invested in must be able to scale their business plan as they continue to grow. Furthermore, due to the nature of small-company investing, the share price is often vulnerable to considerable shifts in the market place, especially if there is an extensive dip in the market or a drop in customer favourability.