Trading AIM and Small Caps

Small caps have more potential to outperform as they are normally managed more dynamically and have more potential for rapid organic growth than large caps.

Analyst coverage amongst small caps is much less extensive which means investors dabbling into these companies would do well to look carefully at annual reports, regulatory news filings and directors’ dealings.

Many smaller cap companies are dependent on one product, technology or client. Their business prospects might also be too closely linked to one director within the company which increases risk.

Traditionally small caps fare worst in any market sell-off which is what happened to many AIM companies during 2008 and 2009 when the financial crisis was at its height.  On the other hand large caps are often held back by bureucracy and are more cumbersome than their small caps brethren with the latter being able to grow sales much faster from a small base since it is easier for a fledgling to grow than for a larger cap.

If you are considering dealing in small caps make sure to be aware that sometimes the bid-offer spread can be quite wide; a wide spread is very common with such shares since they lack market liquidity.