In the June edition of Ecsponews, we considered the benefits of investing in smaller capitalisation companies (small caps) – read the article here. However, while it is clear there are potential growth opportunities in smaller companies, what is it that positions small caps for growth?

The advantages of small capital companies

Strong growth
There is a good chance that the profits of small companies will be much higher than medium and large companies. Sometimes, all they need is a boost to the next level, opting to issue shares rather than creating debt.

Less infighting
It is often the case that large companies will have factions within their inner circle. On the other hand, for small companies, there is no room for this as all the energy is needed to focus on the growth and establishment of the company.

Work opportunities
Small companies are the mainstay of our economy. Companies younger than four years old are creating most of the jobs in South Africa.

Innovation
As a product of an entrepreneur’s initiative, creative thinking and perseverance, smaller companies are often the ones to launch new products and concepts.

M&A activity
It is easier for a big company with a lot of money to take over a smaller company, rather than starting a business from scratch. The big company can pay a premium for the shares, which means that your investment can increase in value overnight. This is one of the main reasons why small companies are so sought after.

Finally, including small capital companies in a portfolio is very likely to result in great profits. This is because their inclusion ensures diversification and has the potential of high returns over the long-term.