The Market Secret

Something that few know when they start in the world of the stock market is the enormous potential that we have as small investors, compared to large investment funds or investors who manage large capital. Large funds, being regulated, must comply with certain rules that make management difficult, one of which is the limitation of not being able to exceed 10% of the portfolio with a position, even when the idea is brilliant (when they exceed they are forced to sell, forced sale). We as private investors can, if we want to, invest 50% or more of our portfolio in a single brilliant idea. The large funds must also be accountable for their management to the fund's participants, which is why they often end up doing work aimed at saving their positions, instead of obtaining large returns. But without a doubt one of the biggest difficulties that a fund faces as it grows and more capital enters, is the difficulty of having positions in small companies due to the low liquidity of this type of company, which has few shares in circulation, making it difficult for large funds to enter and leaving the option to small investors. These and other reasons hinder the high yields of the funds, which although they often want to do a good job, are unable to do so.

>Small caps<

the secret

Elephants don't run, it's the phrase that hangs around wall street and that refers to the fact that big companies have already done the whole journey, and although it can grow a little more, they are already on everyone's lips and the big funds have all their laid chips. Here, as small investors, we can do little, if our goal is to have great results, it is like David fighting Goliath, the chances are low, as long as we find a way to do it.

In a way, small caps (small companies with low capitalization) don´t usually cause great interest for beginner investors, and this is simply because we have never heard of them, they are totally unknown and have low analyst coverage.

Small caps have a series of characteristics that make them interesting for small investors. The following is a list of 7 points for which investing in small companies can give us a great advantage, compared to investing in large companies.

1. Low liquidity

One of the main advantages of individual investors compared to large funds is the possibility of being able to buy everything we want and as much as we want from a company, unlike large funds; and in small caps this makes a lot of sense due to the illiquidity of the companies, or low number of shares available for daily trading. This strictly means that large funds cannot set their sights on small caps (small companies) for the simple fact that they are illiquid (little liquid), or do not trade enough shares in a single day, so to get hold of a company's position, the fund should spend weeks or even months, and conversely, to get rid of the position, it would take weeks, which can be a bad idea.

2. Little known

Small companies are generally unknown, even for investors who are constantly looking for the next Google, there are so many companies and so many markets in the world that the work can be daunting. But once you find the right one, you have the advantage that virtually no one follows it, the big funds can't get in, and they generally trade at an attractive valuation because they're unknown to the market.

3. Growth potential

The growth potential in small caps (small companies) is greater than in big caps (large companies), small caps have high growth for the simple reason that they are in the take-off stage, and are constantly reinvesting all their resources in growing, generally achieving high annual growth, compared to a large capitalization company that grows at a lower rate. Small caps start in small markets, and have high market share potential.

4. Low analyst coverage

There are very few analysts interested in following these companies, simply because there is no way out for them here, the funds do not want analyst reports from companies in which they cannot invest. With the new MIFID II regulation, there are even fewer small cap analysts because costs have increased a lot, now you have to pay for that analysis, which is why many small caps have been left without analysts. In conclusion, the market becomes more inefficient.

5. Controlled by the founder

They are generally well managed by their own founders, or a reference shareholder who looks after the interests of investors. As the interests are aligned, without a doubt, the founder will make everything in their power to keep the company on the right track, because their money is also at stake.

6. Those companies are more volatile

It creates better buying or selling opportunities, they go from being expensive to cheap in a few sessions, which gives us the possibility of entering moments of market panic. It is a situation that doesn't happen so often in large companies.

7. More companies to choose from

There are a greater number of companies to choose from, so there are a greater number of opportunities. The SP500 is made up of the 500 largest companies in the US, a very small part compared to the total American market, which is made up of more than 10,000 Number of Listed Companies. Number of Listed Companies

Classification according to Market Cap

Small cap: between 100 and 1.000 million

Mid cap: between 1.000 and 10.000 million

Large Cap: between 10.000 and 50.000 mm

Mega Caps: > than 50.000 million