With interest rates stubbornly sticking to ultra low levels, there’s little return to be had from savings accounts. With that in mind, if you want to make your money go further then you need to look harder at the investments you can make.
The stock market is rich with both potential and risk in equal measure so it pays to have a strategy. The problem is, there are plenty of contradictory bits of sage investing wisdom out there. Should you, for example, put your money into top performing companies? And which ones are the best stocks to buy? You’ll have heard of these, you’ll be able to research their history and future plans and find it easier to track their progress. They could, therefore, be seen as a sound investment. But although they’re often seen as a stable investment and are likely to pay out dividends, they don’t have much potential in terms of significant growth.
On the other hand, smaller companies offer much greater potential for growth, they’re the chance to spot the ‘next big thing’ and get ahead of the market. They could, therefore, also be seen as a good investment. If you’re a beginner in the stock market and you’re starting in Australia, you’ll probably look for the top three stocks to watch on the ASX in 2022. Keeping an eye on these smaller companies with a projected potential would sound like a good move. But don’t forget that small-cap stocks are also more volatile and are less likely to pay out dividends.
So, you might be wondering by now. Firstly, it depends on your character. If you’re new to investing, big shares – known as blue chip stocks in the States – might give you a ‘safe bet’. However, if you’re experienced with everything from stocks and shares ISAs to ETFs and CFDs then you might feel emboldened to take the opportunities to be had from searching out smaller companies which are on the up. It’s likely that you’ll have some successes and some failures but it can be a real buzz – and very lucrative – to pull a big gain out of the bag.
Here are some other things to consider:
- FTSE 100 companies have performed well in the last year. Smaller companies have been more prone to the fallout of Brexit – in particular because of the drop in the value of sterling. Many FTSE 100 firms have cash and earnings overseas – which means that their wealth has increased in relative terms as a result of the weaker pound.
- Mid and small cap specialist trusts have, as a result of the above, been the subject of discounts which may, in turn, make them good value to invest in now.
- While small companies might well be more prone to fluctuations in the UK economy, they are less inclined to be swept up by big global trends and might not, as this guide notes, suffer if bigger economies take a turn towards protectionism.
- Larger companies are more likely to provide a dividend whereas smaller firms might need to plough this cash back in to invest in growth.
- Investing in a smaller company which gets acquired by a bigger player – a common occurrence – can be lucrative.
- It can be tougher to cash in on shares in smaller companies as there might be fewer potential buyers around.
As you can see, there are pros and cons to each type of investment. In the long term, it pays to have a diverse portfolio which allows you to tap into the benefits of assets in a range of companies across different sectors, sizes and countries – that way you’ll protect yourself against any one of the factors which might cause a fall in the value of those assets. Think big and small if you want the best returns.
Founder Dinis Guarda
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