Small cap ASX shares are a great place for sensible investors to focus their attention.
Specifically, I’m talking about companies below $500 million in market capitalisation (click here to learn what that means).
Many great small companies like Afterpay Touch Group Ltd (ASX: APT), Nanosonics Ltd (ASX: NAN) and TPG Telecom Ltd (ASX: TPM) have risen from this arena. Many have also failed — I outlined 5 ways to avoid losing money in this article.
Here are 3 quick reasons I buy small cap ASX shares.
1. (lack of) Analyst coverage.
Take a great small company like Pushpay Holdings Ltd (ASX: PPH), the Kiwi church software business. Despite almost doubling in around two years, just four professional analysts follow the company, up from three last month.
By contrast, Commonwealth Bank of Australia (ASX: CBA) currently has more than a dozen expert stock analysts following its every move and announcement. That means it’s harder for you to discover something about CBA that hasn’t already been researched and valued.
2. Technology focus
In the ASX 200 (INDEXASX: XJO), the top 200 companies by value, the majority of investors’ focus is given to banks and resources companies. While companies like Seek Limited (ASX: SEK) and Carsales.com Ltd (ASX: CAR) are changing that, look outside the ASX 200 and you’ll find many more exciting tech companies.
3. Growth.
This is obvious. Australia is a small-ish market so if you own a niche small business you have a better shot at making outsized returns if you find the companies early.
For example, when your company gets to the size of Afterpay, oftentimes the only way it’ll be able to multiply your money is if it successfully expands overseas. I like to buy shares before the company goes global.
Summary
Small-cap shares are undoubtedly risky, which is why it’s vital to have a focus on the highest quality companies, with great products and management.
That’s what I do for a living. I recently unearthed these two gems…
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At the time of publishing this article, Owen Raszkiewicz does not have a financial interest in any of the companies mentioned.
