10 Golden Rules of Investing in Small Company Shares
1. Spread your risk. All shares come with some risk, but small cap shares are – by definition – high risk but potentially high reward. So don’t bet the ranch on one company or even one sector: diversify.
2. Don’t believe what you read on Bulletin Boards. The lack of proper research on small caps means that many people turn to Bulletin Boards but inevitably these are forums where people “talk their own book”. In fact, the more active a forum is, the more you should be worried.
3. Don’t invest in companies where the CEO always talks about the share price or spends all his time doing paid-for presentations and TV interviews. Of course, all CEOs must explain the story to investors but those who spend all their time doing that and little time creating actual value via sales are to be avoided.
4. If it sounds too good to be true, it is. This applies to target prices set by brokers and tipsters, which are mega multiples of the current share price or fanciful claims made by CEOs. Apply a test of “does this sound like common sense?” to any fancy claim made.
5. If a company or a CEO is shown to have lied or misled investors, even once, sell all your shares. If one lie has been discovered, the odds are that others lie undiscovered and good companies, or those running them, do not need to lie.
6. Do not give a CEO a second chance. It sounds cruel but, in business, some people are winners and others are just losers. If someone’s last business went bust, do not entrust him with your money on his next venture.
7. On AIM or in the small cap world, fund raisings are almost always at a big discount to the share price. So, before investing, look at a company’s net cash position and its cash burn and if that implies that it will need refinancing within six months DON’T INVEST. Wait until the shares slump after the placing.
8. Look at the advisers to any company on AIM. Good Nomads attract good PLC clients, and bad Nomads represent the dross. If you have seen that a particular Nomad has been involved in a number of scandals or frauds don’t invest.
9. Do not rely on (usually optimistic) profits forecasts. Look at historic numbers too. Look for steady consistent growth. The past performance is often a far better guide to the future than the forecasts of paid analysts guided by overly optimistic management.
10. Do not invest in non-UK small companies listed in Britain. The odd one may fly but history shows that 90% will be dogs. Good small companies list on the exchange in their own country. Bad ones or outright frauds look to gain investors as far away from the basis of operation (or fraud) as possible.[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]