Australia’s stock market isn’t just about BHP and the big banks.
Hidden among the giants are small cap stocks — companies with market capitalisations typically under $500 million.
These tiny stocks pack a punch, offering both growth potential and volatility.
What Are Small Cap Stocks?
Stocks in small cap companies are similar to scrappy underdogs. They are typically young, nimble companies with ambitious growth plans. They may present risks due to their size and liquidity, but they also offer unique opportunities for investors who are willing to do their due diligence.
ASX vs. US Penny Stocks: The Connection
In Australia, we use the term “small cap stocks” or “micro caps”. However, in the US, they’re often called “penny stocks”. The key difference? While US penny stocks trade for pennies (literally), ASX small caps are typically shares in companies trading for less than $1. Both offer high growth potential but considerable risk.
Overseas Markets and Diversification
Investing in ASX small caps doesn’t mean you’re limited to Australian shores. Many of these companies operate globally or have exposure to international markets. Consider small cap stocks with overseas operations.
Recent ASX Small Cap Wins
Let’s celebrate some recent victories in the small cap arena:
- Ultima United (ASX: UUL): This resource company gained over 300% in 2020, proving that small caps can deliver big returns.
- Brightstar Resources (ASX: BTR): Another star performer in 2020, Brightstar focuses on gold exploration and development.
- Legacy Iron Ore (ASX: LCY): Riding the iron ore boom, Legacy Iron Ore saw impressive gains.
- Azure Minerals, the lithium upstart, was acquired by joint bidders Sociedad Química y Minera de Chile S.A. (SQM) and Hancock Prospecting for a whopping $1.7 billion. The acquisition was executed via a scheme of arrangement, with Azure shareholders receiving $3.70 per Azure share. All Azure shares have now been transferred to SH Mining. This strategic move caught Gina Rinehart's Hancock Prospecting's eye, which acquired an 18% stake in Azure’s ordinary shares. The deal underscores Azure's assets' potential, particularly its promising Andover lithium project in Western Australia’s Pilbara region.
Remember, these wins aren’t isolated incidents. Small-cap stocks can surprise you with their resilience and growth potential.
Risks and Rewards
Small-cap investing isn’t for the faint-hearted. Volatility, liquidity challenges, and rollercoaster rides are part of the package. But if you’re willing to dig deep, analyse financials, and stay informed, you might uncover the next gem.
Due Diligence and Professional Advice
Before diving into small cap waters, do your due diligence:
- Research the company’s fundamentals.
- Understand its business model and growth prospects.
- Consult with industry professionals or financial advisors.
Remember, there’s no one-size-fits-all approach. What works for one investor may not suit another. Tailor your strategy to your risk tolerance and investment goals.
Disclaimer: This article provides general information and does not constitute financial advice. Always consult a professional advisor before making investment decisions.
