Why I Trade Small Caps.

Good morning,

One of the questions people tend to ask me is why I am currently so focussed on the UK small caps. It's not fair to say that I don't trade medium and large cap companies as well, but my biggest successes have come from investing in companies that have very low market capitalisations.

My reasoning behind this is that smaller companies are overlooked much more often than larger companies. This could be simply due to the restrictions on many funds from investing in on the AIM and exposing themselves to the smaller companies that float there, but it also comes down to other factors relating to liquidity (the ease of buying and selling a security) and position weighting within the fund.

It's therefore clear that as private investors we are able to take advantage of this anomalous area where the professionals don't take as much interest. I have found that my stock picks that were the most successful within this area were those picked based on support lines and fifty-two week lows within stocks that are sub penny shares with market capitalisations between five and eight million pounds.

This isn't to say that I haven't made mistakes; I have made many. In fact, I'm going to write about my biggest mistakes in separate posts. Nevertheless, my best trades have always been within these small cap companies and my biggest mistakes have always been when I break my own rules and or move out of this market capitalisation zone.

Now, just because this has worked for me, doesn't mean that it will be a good strategy for everyone to employ and I implore you to do your own research and test the waters perhaps with a demo trading account to decide if you are more of a short term or long term holder.