Investment Insights
While the exact classification often differs between index providers and exchanges, typically, companies with a market capitalisation between R2 billion and R20 billion are considered mid-cap shares, while those with a market capitalisation below R2 billion are regarded as small-cap shares.
Mid-caps are typically companies that have already established themselves in the market with a proven track record of success but are still considered to be in a growth phase. These companies may have the potential to expand their market share and increase revenue and profits over time. They are often considered to be a “sweet spot“ for investors looking for growth potential without taking on too much additional risk.
Small caps are typically companies that are just starting out or are in the early stages of growth. These companies may be in emerging industries or have innovative products or services that have the potential to disrupt established markets. However, they may also have a higher risk of failure, as they are not as established as mid-cap or large-cap companies.
It's worth noting that market capitalisation is not the only factor to consider when selecting equities. Other factors such as the company's financial performance, management team, industry trends, and economic conditions, should also be evaluated. Some small- and mid-cap stocks used to be large caps and may have seen their value fall sharply due to mismanagement, fraud, strategic mistakes, or reduced demand for their products or services.
Investors should also consider their risk tolerance and investment goals when selecting mid-cap and small-cap shares. Diversification is also important to manage risk, and investors should consider including a mix of mid-cap, small-cap, and large- cap shares in their portfolio.
Factors to consider when selecting mid- and small-cap shares
Investment strategies for mid- and small-cap shares
It's worth noting that these strategies are not mutually exclusive, and investors may use a combination of them when selecting mid- and small-cap shares.
Risks and challenges of investing in mid- and small-cap shares
While investing in mid- and small-cap shares can be a profitable strategy, it also comes with a higher risk and challenges. Some of these risks and challenges include:
In closing
Investing in mid- and small-cap shares can be a profitable strategy for those willing to take on higher risk for potentially higher returns. It is, however, essential for investors to conduct thorough research and analysis before making investment decisions and to diversify their portfolio to manage risk.
A useful tool for gaining exposure could be investing in a mid-and-small cap focused ETF. For South African investors, it is possible to gain exposure to the JSE Mid-Cap Index via the FNB Mid-Cap ETF. Unfortunately, there is not a small cap equivalent available currently. Investors can also consider monitoring our quarterly Mid-Cap Best Ideas publication, which also covers the small-cap space.
Internationally, there are more ETF options available to invest in this space, including the iShares MSCI Europe Small Cap ETF, The Vanguard Small Cap ETF (for US exposure), the iShares MSCI World Small Cap UCITS ETF and related mid cap trackers.
