Small caps: what they are and the best options on the market

Small caps: what they are and the best options on the market

Table of Contents

Small caps is the name given to the shares of companies that have a low market value on the Stock Exchange (B3).

But not everyone really knows how they work, what is their potential for appreciation and what are the best options to invest in this type of asset.

With that in mind, we have put together this GUIDE with everything you need to know about small caps, including valuable tips for reducing investment risks and getting your securities right. Interested? Stay with us!

What are small caps?

Small caps are shares of low capitalization companies, whose market value is between US $ 300 million and US $ 2 billion. In order for an asset to enter this classification, aspects such as the volume of trading on the Stock Exchange and the annual turnover are also analyzed.

In general, small caps are issued by two types of organizations:

  • new companies that diversify their sector of activity, but are not market leaders;
  • companies with some time in the market, but which belong to sectors of lesser importance in the economy, and may or may not be market leaders.

The fact that these assets come from smaller companies does not mean that they are less attractive: they can offer very high returns, although the risk of losses is also greater, as we will see later.

How are shares classified on the Stock Exchange?

In addition to small caps, there are several other types of shares on the market, classified according to the level of capitalization of the companies. Among the best known are large caps, also called blue chips. The nickname comes from casino games, where blue chips are usually the most valuable.

Unlike small caps, large caps are the shares of large companies, whose market value exceeds US $ 10 billion. They are usually very popular with investors, as they are issued by solid, profitable companies and leaders in their sectors.

However, capitalization is not the only factor to be considered when classifying a large cap. It is also necessary to observe whether the asset has qualities such as good visibility, high liquidity, low volatility and stability in the market.

For example: there are shares in companies that are worth more than US $ 2 billion, but that are still considered small caps, since the assets have low liquidity, that is, they are more difficult to sell on the Stock Exchange.

Assets at B3

Although small caps and large caps are the best known categories, they are not the only ones. See below all types of assets of the Stock Exchange according to the companies' market value:

  • Nanocaps: shares in companies worth less than $ 50 million;
  • Microcaps: shares of companies that are worth between US $ 50 million and US $ 300 million;
  • Small caps: shares in companies worth between US $ 300 million and US $ 2 billion;
  • Mid caps: shares of companies that are worth between US $ 2 billion and US $ 10 billion;
  • Large caps: shares in companies worth between US $ 10 billion and US $ 200 billion;
  • Mega caps: shares of companies worth more than US $ 200 billion.

It is very rare to find companies that issue nanocaps listed on B3, as the cost of going public is high, which makes the process difficult for smaller companies.

Among the stocks with less risk, the maximum level that UK residents companies reach is that of large caps, with securities such as Petrobras (PETR4), Vale (VALE3) and Ambev (ABEV3).

If you are not used to this type of investment, know that the codes (such as PETR3) represent the names with which the assets are traded on the Exchange.

Although there is no national mega cap, you can easily get this type of action. Because they are issued by companies known worldwide, such as Microsoft (MSFT34), Facebook (FBOK34) and Apple (AAPL34), they are available in several countries, including Brazil.

>> Do you want to deepen your knowledge of the financial market? Check out this other blog post: What are actions? Find out everything about it! <

Advantages of investing in small caps stocks?

The main advantage of small caps over large caps is the profit potential they offer.

Because they are issued by robust and stable companies, blue chips are unlikely to have large spikes in appreciation. On the other hand, small caps generally come from companies that are growing fast, with a promising future ahead and high potential for return.

Many companies that today have high capitalization started as small caps. A good example is Magazine Luiza, whose value of two papers jumped from R $ 0.99 in 2015 to R $ 170 in 2021.

It is common for companies with excellent management and excellent results in their sectors to be ignored by investors due to the low volume of negotiations.

Having a vision of the market and knowing how to identify these opportunities is an efficient way to make money including small caps in your investment portfolio.

What are the risks of small caps and how to avoid them?

As with any investment, the greater the potential for gain, the greater the risks involved. In the case of small caps, some risks are very specific to this type of action. Check below what they are and how to avoid them.

Low liquidity

Because they are issued by smaller companies, small caps do not have as much demand in the market, that is, they are low liquidity assets.

As a result, you may find it difficult to find a buyer when you want to sell them or need to negotiate for a price well below what they are worth. In extreme cases, you may not be able to sell your bonds or reduce the price too much.

The good news is that analyzing this risk is quite simple. Just observe the daily amount of trades by accessing the graphical platform and looking at the “Volume” indicator.

Possible poor pricing

Expanding companies' shares can be difficult to price, since it is not clear what the company's real long-term results will be.

To reduce the chances of losses, set a return level that makes you more comfortable taking that risk. If you notice that the asset has been appreciating below this minimum limit, think carefully before buying.

Another good tip is to compare the indicators of small caps with those of securities of companies in the same sector that have been in the market for longer. Thus, it is possible to evaluate the price more accurately.

Less attention from analysts

It is natural that most financial analysts pay more attention to large caps, which makes it more difficult to find complete and up-to-date materials on small caps.

To deal with this problem, companies classified as small caps usually have an investor relationship portal where they disclose simple and clear information about their assets.

So, before including these stocks in your portfolio, take a look at the website to find out more details about the securities you are buying.

Business management

As the companies that offer small caps are usually new to the market, it is difficult to be sure about the quality of their management. When it comes to larger organizations, information is usually easier to access, especially because of the interest of the press.

To mitigate this risk, keep an eye on all possible data about the company, including its sector, market size, competitors and details on the strategic and financial management of the business.

What are the best small caps to invest in 2021/2022?

To assess the potential of small caps, it is essential to keep an eye on the SMLL index, which indicates the main assets of this market. To compose the index, the shares must be outside the list of the main companies of B3, which together accumulate 85% of the total value of the Exchange.

Even with low capitalization, small caps have increasingly won the preference of investors. In 2021, the SMLL index rose by 58.2% and the trend is that this will continue in 2021, considering that the fall in the Selic rate heated up the stock market.

As we are talking about variable income, the scenario can change at any moment: what is good today may not be tomorrow, and vice versa. However, given the recent history, it is possible to point out small caps that can achieve good results in 2021. Check out some examples:

Trisul (TRIS3)

Among the largest real estate developers in Brazil, it currently has shares traded at values ​​close to R $ 15, having gained 228% in the last year.

PetroRio (PRIO3)

The largest private oil company in Brazil offers assets for around R $ 44, having increased by 275% in one year.

Via Retail (VVAR)

Owner of major brands such as Pontofrio and Casas Bahia, she has shares for approximately R $ 14, up 150% in the last year.

Now that you know what small caps are and how they work, how about putting what you've learned into practice? Study the market well and analyze the scenario to always invest in the best options.

And don't forget to diversify your portfolio: this is the key to getting good results and becoming a successful investor.

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