Huge Potential of FTSE Small Cap Index

Financial Times Stock Exchange (FTSE Small Cap) Index is an index of international small market capitalization companies. But before you get a hold of what this index has to offer, let us take a stroll on what small market capitalization is. 

Companies with relatively small market funding are called small caps. The market value of a company is determined by its capitalization or its outstanding amount of shares. Generally, these are markets with a cap ranging from $300 million to $2 billion. 

Potentials of the Small Cap Market 

Growth

Investing on this market such as the companies listed in the FTSE Small Cap index, can benefit an investor immensely once previously low price stocks increase in value as the businesses succeed. Since these companies are relatively small compared to mid and large cap companies, they’re growth potential is huge. 

Investing-consulting firm Ibbotson Associates’ records state that small caps have gained an immense value by an average of more than 12 percent per year between 1927 to 2007. During the same time frame, large caps only increased over 10 percent. 

Performance

Market performances of small cap companies do not usually reach news headlines when making progress. But some indices show that small cap companies can match or even beat the performances of large cap companies in the long run. 

Diversity

Investing in small cap stocks can bring balance to investors’ asset portfolio. This makes them spread the amount of risk they are taking on. Market volatility is a huge challenge, needing a diverse investment portfolio to survive. 

FTSE Small Cap companies and the likes are known for their higher returns and higher volatility. These are often used to complement mid and large cap equities to achieve a well-diversified portfolio. 

The Index Itself 

The FTSE Small Cap index on the other side, includes companies with stocks worth as little as €150 million. This consists of the 351st to the 619th largest listed companies on the London Stock Exchange (LSE) main market.

Since the depths of the financial crisis in February 2009, FTSE Small Cap index has returned 290 percent to its investors, including dividends when FTSE 100 only returned 156 percent. 

Imagine this scenario, if you invested €1,000 in the FTSE Small Cap index by the end of December 2008, you will have a €3,055 return, including all reinvested and adjusted dividends for the effects of inflation. The same amount will only give you €1,908 if invested in the FTSE 100 index. 

Analysts recognize the risk of investing in small cap indices due to market volatility. But, this risk can be mitigated once an investor entrusts his funds on a well-diversified index as FTSE.