The stock market in the UK has recently formed a bottom and appears to be ready for a post-COVID rally for smaller-cap stocks. As an example, prices for the iShares MSCI UK Small Cap index is resting upon support, a good sign that this sector in the market is ready to move upwards.
YOUR CAPITAL IS AT RISK
Are you thinking of investing in the small-cap stock market given its recent rally? Would you like to know which stocks are most likely to rally and produce gains that can be multiples more than for large-cap companies? Investing and trading these securities can be very rewarding. However, the opposite is also true.
While these companies have a significant market cap and a level of stability, swift changes can still happen with their future fortunes. Many of these companies are in this category due to their share prices falling a great deal over the past few years, but there is always the possibility of a quick recovery.
In the paragraphs to follow, we will cover five small caps and three micro-cap stocks for your review. We will delve into the details of investing in such stocks, the potential rewards as well as costs, what you need to know before investing in this group, and how to go about setting up an account online for buying and selling small-cap and micro-cap shares.
Table of contents
- WHAT ARE SMALL-CAP STOCKS AND MICRO-CAP STOCKS?
- BEST SMALL-CAP STOCKS TO BUY
- HAMMERSON (LON: HMSO)
- MARSTON’S (LON:MARS)
- OXFORD BIOMEDICA (LON:OXB)
- PENDRAGON (LON:PDG)
- CENTAMIN (LON:CEY)
- BEST MICRO-CAP STOCKS TO BUY
- CALNEX SOLUTIONS (LON:CLX)
- SHOE ZONE (LON:SHOE)
- PREMIER MITON GROUP (LON:PMI)
- WHY INVEST IN SMALL-CAP COMPANIES?
- WHAT TO KNOW BEFORE INVESTING IN SMALL-CAP COMPANIES
- HOW TO TRADE SMALL-CAP STOCKS ONLINE
- Final Thoughts
WHAT ARE SMALL-CAP STOCKS AND MICRO-CAP STOCKS?
Small-cap stocks are companies with a market valuation that ranges from $300m to $2bn. Micro-cap stocks are companies with a valuation that ranges from $50m to $300m. Small-cap and micro-cap stocks are some of the best stocks to invest in given their significant upside potential.
These stocks, however, may display more-than-average price volatility and are generally regarded as higher risk than larger-cap entities. There is always the possibility that a few of these companies will hit their stride and rise into the mid-to-large-cap category. It is also a fact that the number of these firms is much greater than for their mid-to-large-cap brethren, posing a selection exercise to ascertain which companies might take off.
Market capitalisation delineations are important because investors and fund managers often group assets according to their size. Companies of similar sizes tend to respond in similar ways to market pressures. One other benefit is that larger firms tend to acquire smaller firms as another way to achieve growth objectives. Investors may have long-term holding strategies, but an early acquisition can usually deliver a favourable price point and free up investment capital for other interesting possibilities.
BEST SMALL-CAP STOCKS TO BUY
HAMMERSON (LON: HMSO)
Hammerson is a leading British property development and investment company. The company has been through a tough period after many retailers were forced to close due to the COVID-19 pandemic. However, it devised a turnaround plan that involves the disposal of some of its retail properties to minimise exposure to the troubled sector. The company has a new CEO and seems to be turning its fortunes around, which could generate impressive gains in the near future.
YOUR CAPITAL IS AT RISK
Share prices for Hammerson have generally followed the trend for this sector of the industry, as presented in the MSCI index chart above. The price now sits on a long-term support level, and the evident Double-Bottom formation would suggest that a positive upward trend could be imminent.
Marston’s is a popular British pub chain whose revenues took a hit due to the COVID-19 lockdown measures imposed in the UK. The company has done much better than other pub chains given its huge presence in the suburbs, but prices have slipped down to historical support levels.
As with Hammerson, the firm appears ready for an upward turn, as its downward slide has concluded.
OXFORD BIOMEDICA (LON:OXB)
Oxford Biomedica is a British biotech company that produces treatments based on gene and cell therapy technologies. The company struck it big when AstraZeneca gave it a supply contract worth millions to produce its COVID-19 vaccine in early 2021.
YOUR CAPITAL IS AT RISK
Oxford Biomedica’s share prices quickly accelerated upward, peaking near the end of 2021, only to plummet after an acquisition, a drop in vaccine demand, and lower revenues. It is now considered a ‘Buy’ by analysts and could appreciate rapidly once more.
Pendragon is the second-largest retailer of motors in the UK, owning and operating a number of individual brands, including Evans Halshaw, Stratstone, Quickco, and CarStore used car parts, as well as affiliates in the US. As can be discerned from the chart below, it has been successful over the past 18 months, and analysts foresee even higher prices to come.
For those seeking to add Pendragon to their portfolios, caution is advised. As can be seen in the chart above, investors have already driven the stock prices to very high levels – notably beyond those of 2021.
Centamin is a UK-listed gold mining company that operates the world-class Sukari gold mine in Egypt and other mines in Western Australia. The company’s shares fell heavily from 2021 through part of 2022 due to production issues at this mine. A new CEO has created a turnaround plan for the mine; earnings have been up; and investors like what they see, driving share prices up in late 2022.
YOUR CAPITAL IS AT RISK
Can Centamin’s rise continue? One analyst believes that the shares are undervalued, but mining stocks are a high-risk/high-reward proposition.
BEST MICRO-CAP STOCKS TO BUY
CALNEX SOLUTIONS (LON:CLX)
Calnex Solutions is a technology company whose products have been well received by the market. Its specialty resides in the telecommunications sector, driven by its testing and measurement services. Recently, its products have performed favourably with the rollout of 5G networks. The rise in the stock price in the chart below is evidence of its strong growth. The firm is unique in that its CEO is also the founder of the company and owns a major piece of the action.
YOUR CAPITAL IS AT RISK
Although share prices have nearly doubled over the past 16 months, observers still claim that there is further growth potential. Barring any supply chain issues or component shortages, this stock remains a positive buy, but pick your spots carefully.
SHOE ZONE (LON:SHOE)
Shoe Zone is focused on delivering low-cost footwear to the public in the UK. It operates over 500 stores across its marketplace. When times are tough and inflation is rising, firms in the low-cost niche tend to perform well, as can be seen in Shoe Zone’s impressive chart below. Prices over the period chosen have nearly tripled.
Shoe Zone has been keen on running a tight ship, has kept costs in line and pushed revenues higher. If there is a potential risk here, it could come from competition, and there is always the possibility that investors have inflated prices.
PREMIER MITON GROUP (LON:PMI)
Lastly, we have a fund management company, Premier Miton Group. Like other fund management companies, COVID-19 hit Miton hard – clients increased withdrawals to deal with uncertain futures and the need for cash. Share prices fell, but Miton appears to have stabilised since.
However, firms such as Premier Miton Group do tend to follow the economy, which is certain to return at some point, and when it does, new deposits will create higher fund fee income.
YOUR CAPITAL IS AT RISK
Crucially, Premier Miton has a reputation for drawing old customers back into the fold – a positive sign that a turnaround is possible, accompanied by a shift in investor sentiment.
WHY INVEST IN SMALL-CAP COMPANIES?
The main advantage associated with investing in small-cap shares is that their potential returns are quite high compared to large-cap companies. For example, if a small-cap stock trading at $1 rallies to $5, which is very likely, then the investor books a 500% gain – as opposed to a $50 gain on a company trading at $200, which translates to a 25% gain.
These types of multiples in stock appreciation are rarely seen with mid-cap and large-cap companies. The potential for large gains, however, can also bring higher risks in the form of price volatility. Companies can fail in their markets and have to sell off assets or be acquired by a larger concern. For these reasons, close monitoring of these companies is a basic requirement.
WHAT TO KNOW BEFORE INVESTING IN SMALL-CAP COMPANIES
There are a few aspects you must keep in mind when investing in small-cap stocks. They are highly volatile and may experience massive price swings on a day-to-day basis. Most small-cap stocks might not be profitable as they are still building their business, which means that you are unlikely to get any dividend payments. Even when there are profits at this stage in the company’s evolution, it will more than likely invest those funds back into the business. Also, try to invest only in companies whose business model you understand, as this will help you manage your investments better.
Small-cap firms are also more susceptible to wild swings in value when economic downturns become reality. Prices can spiral out of control until a new equilibrium is found. It also does not help that certain hedge funds look for downturns to use shorting strategies to drive prices even lower. The COVID-19 pandemic caused major price swings, which are still impacting some sectors of the market.
Access to resources can be another issue. If cash flows turn negative, then these firms will have a harder time locating additional funding sources. The company may have the greatest idea in the market or the latest technology to beat the band, but without the necessary capital to live through the bad times, recover, and then grow again, small-caps can have a very uncertain future – and where there is uncertainty, there is always price volatility.
You will also want to ensure that there is ongoing interest in your chosen company. Follow increases in volume, abrupt changes in the average true range (ATR) indicator, and any spikes or bumps in prices, as all of these are examples that investor sentiment is changing. With more attention comes more liquidity and tighter Bid/Ask spreads, necessary ingredients for successful entries and exits when trading or investing.
HOW TO TRADE SMALL-CAP STOCKS ONLINE
Firstly, you need to research the companies that you want to trade and choose the ones that meet your specific criteria. You could be looking for stocks that adhere to ethical investing standards, or companies in a particular industry, or very volatile stock. By researching the stocks you want to trade, you are doing your due diligence and weeding out the stocks that do not fit your criteria, leaving you with the very best stocks.
Find a Broker
Next, you need to find a broker that has access to the shares of the companies you want to trade. AskTraders has researched most of the brokers in the industry and has singled out the very best brokers based on various criteria. Check out our list of verified brokers to choose the one that meets your specific needs.
Open and Fund an Account
Once you have chosen a broker, you need to open an account with it and deposit funds into your account so that you can start trading. Sometimes, it might take a day for the broker to verify your account so that you can start trading your preferred stocks.
Set Order Types
It is advisable to set the price at which you want to buy or sell a stock using what is known as a limit or stop order. Choosing either of these order types will ensure that you buy the stock at your chosen price. Still, there is a risk that your preferred price may not be available, in which case you might have to adjust your price to align with market prices.
Select and Buy Shares
You can choose to trade a stock or multiple stocks, but it is prudent for beginners to trade a maximum of just five stocks as they learn the markets. You can increase the number of stocks and trades you make over time as you get more experience. Remember not to panic buy or sell, but to trust your research and stick to your trading plan.
Small-cap stocks offer some of the best investment returns given that they typically have the potential to rally much higher than their large-cap counterparts. Such stocks can multiply their valuation many times over in a short period of time, which makes them very attractive. However, small-cap stocks are considered to be riskier than large-cap stocks, and investors should always be aware of these risks, which have been outlined above.
Navigate to AskTraders’ list of top brokers to embark upon your small and micro-cap stock journey.