The S&P/ASX Small Ordinary (ASX: XSO) represents the small-cap component of the Australian stock market. It includes all companies in the S&P/ASX 300 while excluding companies in the S&P/ASX 100. Small-cap stocks refer to those companies’ whose market capitalization ranges between $250 million and $2 billion. The market capitalization of a company represents the market value, in dollars, of a publicly traded company and is calculated by multiplying its outstanding shares by its stock price. Meanwhile, a small-cap stock is based solely on a company's market capitalization and not its stock price. Highly speculative traders look to buy ASX small-cap stocks in Australia, which have a high probability of generating a supernormal return on investment. Small-cap stocks are highly risky, but some of the best ASX small-cap stocks also have the potential to turn a small investment into a bigger one.
Here are Some Examples of Some of the Australian Small Cap Companies, as Follows:
Deep Yellow Ltd. (ASX: DYL) is in the energy sector and has a market cap of $803.80 million. Lotus Resources Ltd. (ASX: LOT) has a market cap of $362.88 million. Core Lithium Ltd. (ASX: CXO) is in the basic materials sector and has a market cap of $801.24 million.(Note: market cap as on 14 September 2023).
What are the Differences Between Large, Mid-cap, and Small-cap Shares?
Generally, there are three categories of companies classified based on their market cap. There are small-cap stocks, mid-cap stocks, and large-cap stocks on the ASX.
The small-cap companies are typically penny companies that sit outside of the largest 100 on the ASX by market cap. The S&P/ASX small ordinaries index (XSO) represents smaller members of the S&P/ASX300 index. It’s used as an index for small-cap Australian stocks.
The mid-cap companies are normally defined as having a market size below $10 billion; these are company categories under the S&P/ASX Midcap50 (XMD), which is comprised of the members of the S&P/ASX 100, excluding stocks in the S&P/ASX 50.
The S$P/ASX 100 (XTO) is Australia’s premier large-cap index, which contains 100 blue-chip stocks.
What are the Advantages and Disadvantages of Investing in Small Caps?
Here are the explanations of the advantages and disadvantages of investing in small caps, as follows:
Growth potential: The small-cap companies in Australia are considered to be the engines of innovation and economic growth. These are available in every sector, such as technology, healthcare, and emerging industries. These companies can offer substantial returns for investors willing to take on a higher level of risk. This means small companies have, by definition, greater growth potential than large-cap companies.
Capital gains: The small-digit small-cap stocks, when multiplied by their growth, give exponential returns, and that is possible in such categories of ASX small-cap companies.
And the disadvantages are:
Volatility: The annual volatility, which is the 52-week standard deviation, is normally very high in a small-cap company’s stock. The share price of small-cap shares can fluctuate to a greater extent than that of large-cap shares during market upturns and downturns.
Risk: The beta generally denotes very high systematic risk, and therefore investing in smaller companies can be more risky as their balance sheets are not as strong as those of larger companies.
Top Small Cap Stocks for 2023
Here are some of the good small-cap ASX companies that might have potential for 2023. Let’s look at them:
• Healthia Ltd. (ASX: HLA)
• Adairs Ltd. (ASX: ADH)
• Artemis Resources Ltd. (ASX: ARV)
• Platinum Asset Management Ltd. (ASX: PTM)
• U.D. Holdings Ltd. (ASX: GUD)
Frequently Asked Questions (FAQ)
Should I invest in ASX small caps?
It solely depends on someone's personal goals and risk appetite. Small-cap investments are very risky during a downtrend or when the economic outlook seems very sluggish. It is always the right parameter to screen companies that have good fundamentals and have future prospects. Someone should have the courage to hold them so that they can enjoy the fruits of an upward rally in the market.
What is a small-cap on the ASX?
The small-cap companies are typically smaller in market size and sit outside of the largest 100 on the ASX by market cap. The S&P/ASX small ordinaries index (ASX: XSO) represents smaller members of the S&P/ASX300 index. It’s used as an index for small-cap Australian stocks.
Which small-cap stocks are the best?
There are some of the best fundamental small-cap ASX stocks, such as Healthia Ltd. (ASX: HLA); Adairs Ltd. (ASX: ADH); Artemis Resources Ltd. (ASX: ARV); Platinum Asset Management Ltd. (ASX: PTM); and U.D. Holdings Ltd. (ASX: GUD).
Is investing in small-cap stocks risky?
Yes, technically, the small-cap company has a high 'beta, which means a high variance in the stock with respect to the market. Investing in such a company might have potential risks due to various facts, such as unstable fundamentals, bad economic conditions, and companies mostly found in financial debacles.
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