About Micro Caps

The term “micro-caps” is used by the market to describe companies with a relatively small market value. They are often also termed “emerging companies”.

Cygnet Capital defines micro-caps as ASX-listed or soon-to-be-listed companies valued at under $200 million. This investable universe is vast, with micro-caps usually comprising around 75% of the companies listed on the ASX.

The Benefits of Micro-Cap Investing

Micro-cap companies are typically under-researched by the market and overlooked by investors.

Because research is expensive, most share market analysts only cover the larger companies where greater commissions can be generated. In turn, investors look for research to support their investment decisions, and as a result, tend to be unaware of the opportunities available in the micro-cap sector.

Without research, many trade at a discount to ‘covered’ stocks, meaning there are bargains to be found.

US research suggests that listed companies without research trade at a 20-30% discount to ‘covered’ stocks. This means there is the potential to discover quality micro-cap businesses before they grow big enough for the rest of the market to take notice.

Including micro-caps in an investment portfolio may increase diversification.

Micro-caps typically have low correlations to other equity classes, meaning they won’t necessarily be affected by the same market fluctuations. Having a diversified portfolio reduces your overall risk.

The lack of readily available research and the unique characteristics of the micro-cap sector can make investing relatively labour intensive. This is why it’s important to use specialists like Cygnet Capital, that have a history of successful investing, advising and capital raising in this niche market.