Why invest in ASX Small Caps?

Investors go to ASX Small Caps because of their huge growth potential. Small Caps can double, triple and more in value and the experts call this ‘alpha’. Investors need a couple of stocks in their portfolio to double and triple to really outperform the market. It’s this outperformance that Small Caps provide and you simply can’t achieve the kinds of gains in other investments than you can in ASX Small Caps.


Small Caps can also pay dividends. When Small Caps pay dividends it shows that the company is a quality investment and it represents an important price signal for the market. 

Many Small Cap stocks are cheap, costing under $1 to buy, so investors can start small and build up a portfolio over time. You don’t need a big capital base to invest in Small Caps. 

To buy $100 CBA shares at $85/share you need $8,500. But if you invested that money into small caps you could invest $2,000-$2,500 in 3-4 small cap shares. Many Small Caps pay dividends for those looking for an income stream but the primary reason to invest in ASX Small Caps is because you are buying shares with true growth potential.

Small Caps also provide true diversification at cheap prices. Diversification means reducing your risk by not putting all your investment eggs in one basket. Investors can buy shares in well run companies that operate in growth industries, from biotechs and miners, to smaller banks or food producers. There is a vibrant group of Small Caps listed on the ASX so investors can access exposure to different growth industries and varied risk profiles cheaply. 


If investors are looking for true share price growth, then Small Cap growth stocks should be part of their balanced portfolio.

What are ASX Small Caps?

Small Caps are the small companies listed on the Australian Stock Exchange. The company’s size is determined by market cap or market capitalisation. This is simply the current share price times the number of shares the company has listed on the ASX. This market cap figure tells you how big or small a company is.


Small Caps are any stock with a market capitalisation of between $50m and $600m. ASX shares with a market cap of under $50 million are emerging stocks or micro-caps.

There are over 2,000 stocks listed on the ASX and most of them are Small Caps. These smaller stocks that are less researched is where investors find the big share price growth opportunities.

Small Caps are also called Growth Stocks, Emerging Companies, Micro-Caps or Penny stocks but essentially these terms all mean the same thing, it means they are small companies on the ASX.

What is an example of an ASX Small Cap?

ASX Small Caps are the small but fast growing companies on the ASX. They have listed on the ASX to access capital to fund growth. Think Afterpay (APT), Kogan (KGN), Medical Developments (MVP). But they also operate in traditional businesses like gold miners Evolution Mining (EVN), lithium producers, telcos Macquarie Telecom (MAQ), ship builders Austal (ASB), and law firms.

ASX Small Caps operate in every industry and sector, and all companies, even BHP at one time started out as a Small Cap stock. Small Caps come in many shapes and sizes and are often in niche or emerging industries or are disrupting the way traditional companies do business, or are inventing new markets.

There are hundreds of examples of Small Caps that turn big! Some companies you have now heard of, the classic recent example being Afterpay but when they first listed you probably hadn’t. When they are still small they don’t cost much to buy.

What are Blue Chips and what are the stock market indices?

Australia has one of the most concentrated stock markets in the world with the top 10 companies (the banks, Telstra, BHP) comprising around 50% of the total value of the ASX!

The S&P All Ordinaries Index

To give some perspective on size, the All Ordinaries Index contains the 500 largest ASX listed companies and accounts for roughly 90% of the Australian equity market. The Commonwealth Bank Australia (CBA) which is the largest stock has a market capitalisation of $150 billion, and the smallest stock in the All Ordinaries Index has a market capitalisation of $50 billion. These companies are huge.

The S&P All Ordinaries Index

To give some perspective on size, the All Ordinaries Index contains the 500 largest ASX listed companies and accounts for roughly 90% of the Australian equity market. The Commonwealth Bank Australia (CBA) which is the largest stock has a market capitalisation of $150 billion, and the smallest stock in the All Ordinaries Index has a market capitalisation of $50 billion. These companies are huge.

The S&P/ASX Small Ordinaries index

The Small Ordinaries index is used as a benchmark for Small Cap ASX equity portfolios. Some of the stocks in the Small Ordinaries are still very big and include Fisher & Paykel, Seven Group, and Breville with market caps still in the billions. You could hardly describe them as small.
With a market cap above $600m or in the $billions a company’s opportunity for fast growth becomes much harder.

Why you need to know about the S&P/ASX Emerging company's index

You need to know about emerging companies because they offer ASX investors amazing growth opportunities. This Emerging company’s index consists of 200 Australian Micro-Cap companies ranked between 350 and 600 by market capitalisation and have met a reasonable liquidity test, which means that it is reasonably easy to buy and sell the stock.

It’s the small caps between $50-$600 million that are under researched by stock brokers and fund managers as they are too small for the large fund managers to invest in. Individual investors have an advantage over the professionals in this space.

Many Small Caps move out of the Emerging companies list and into the Small Companies list banking big returns to Small Cap investors. Small Caps in the Emerging companies index include Splitit, Mermaid Marine, and Northern Resources and it’s this size of companies where individual investors can find big growth opportunities.

Your wealth grows as the small company grows. There are huge growth investment opportunities in ASX Small Caps, which is why investors love Small Caps.

How do we choose ASX Small Caps?

You choose to invest in Small Caps because they give you growth. In other words, their share price can move higher more quickly.

Investing successfully in Small Caps is all about picking the right stock! It comes down to research, finding a well run company with experienced management, that is positioned for growth and its financials stack up. To make money from a small cap stock you are trying to buy it when it’s still small before a big growth run so you don’t pay too much for it.


At Under the Radar Report we look for value which means we hunt for Small Caps that are covering costs, but have an option on greatness. We follow a 7 step process for choosing ASX Small Caps:

  1. Look for growing sectors
  2. Cash is king: check the balance sheet, and check if it's got the cash flow to pay for day to day expenses and to ensure its profits can pay for future growth.
  3. Look at the Small Cap share price and chart
  4. With Small Caps a quality Management team is really important
  5. What are the Bull Points/Bear Points?
  6. Valuation methodologies and ratios
  7. Where is the Catalyst? What will happen in the future that will lead to this stock being valued much higher in the future?

It’s the future catalyst for growth that is at the forefront of every Small Cap investment. Financial analysis is essential to make sure you are investing in a quality company that is going to reward your investment through share price growth and future dividends.

To find and understand the growth opportunities that Small Cap stocks provide you need strong underlying financial analysis. We suggest choosing Small Cap stocks to buy in growing sectors including manufacturing, healthcare, energy, health and food, and technology.

Cash is king especially for Small Caps and investors should choose stocks to buy that have solid cash flow. Without cashflow how can a Small Cap survive and grow? Management is particularly important for Smaller companies and investors need to check management’s expertise. Look for Bull Points and Bear points, it’s always important to know the risks as well as the future potential.

Investing successfully in Small Caps is about picking a company operating in a growth industry, that has cash flow, is well run and that has a tangible catalyst for growth. Then you want to make sure that you are paying a reasonable price for that growth.

How do I invest in ASX Small Caps?

When you are ready to buy an ASX Small Cap stock you can buy them through a stock broker or easily do it yourself with an online share trading platform. It can often be easiest to go to who you bank with as it makes setting up the account easier but check the brokerage fees they charge.

  1. Choose an online broker.
    It’s very easy to set up an account and there are many competitive online brokers to choose from. Remember to compare the brokerage fees you will pay each time you buy and sell. For more information on choosing an online broker see our Beginner’s guide to investing.

  2. Open your account.
    It will take a few minutes and is just like setting up any bank account and you need your ID, bank details and TFN.

  3. Get a short list of stocks
    You can get a short list by following the 7 step process above, or by accessing independent share research like Under the Radar Report. You can join now and access our best stocks to buy. You need to know the risks (the bear points as well as the bull points) and to check out the financial statements to ensure the ASX Small Cap you buy is a profitable business with a catalyst for growth.

    Our stock research is independent and not PR from the company promoting itself. Join today and select one of our 10 best stocks to buy and start investing confidently.

    It can seem overwhelming but the hardest thing is to hit buy on your first share purchase.

Best small cap growth list 2021

Recognising the potential of a small cap stock has led to some of the best returns for individual investors. Being an early investor and buying in when a company is still small can lead to some seriously stellar returns.

Think or Afterpay when it was just $2.51 in May 2017 or Northern Star when it was only 83c. The returns that can be made from investing before a company is a big name can transform wealth.


Picking Small Caps is about looking for the catalyst for growth, and following the seven steps to choosing stocks. Not every small cap will outperform, know your risks, choose companies with good fundamentals that reflect the opportunity for future growth and with smart stock picking, small cap investing can be extremely rewarding.

The 10 best ASX Small Caps in 2020 that delivered outstanding growth and fast returns.

  • Afterpay (APT) tipped at $2.51 now $147.00!
  • Zip Co (Z1P) tipped at $0.66 now $12.00!
  • Northern Star (NST) tipped at $0.83 now $10.91!
  • Nick Scali (NCK) tipped at $1.40 now $11.71!
  • Codan (CDA) tipped at $1.52 now $12.94!
  • City Chic Collective (CCX) tipped at $0.48 now $4.09!
  • Seven West Media (SWM) tipped at $0.08 now $0.54!
  • Evolution Mining (EVN) tipped at $0.72 now $4.28!
  • Data 3 (DTL) tipped at $0.99 now $5.93!
  • Macquarie Telecom (MAQ) tipped at $8.15 now $50.00!

Why buying a basket of ASX Small Caps is your best bet to profit from disruption

Disruption stocks are simply companies that have found a lower cost way of doing business. They are not encumbered by tradition and turn the market on its head.

Disruptive small caps such as fintech get a lot of press following high profile successes like Afterpay (APT) and Zip Co (Z1P).

When we started covering these companies in 2017 their valuations were less than $500m. Fast forward to today and APT alone is over $28bn, while Z1P is a “measly” $3.1bn. This kind of appreciation of value sees many new to the market forgetting about the past disrupters Seek.com and REA in the world of digital advertising. These companies are now the establishment.

Three Disruptive Small Caps

We give you 3 disruptive ASX Small Caps below but first, it’s important to understand why buying a basket of Small Caps is your best bet to profit from disruption.


All these companies led investors to making huge gains, but it’s important to remember that disruption most often originates in the world of Small Caps. As we say, disruption is the natural space for small companies looking to grow quickly by building market share at the expense of their bigger counterparts.
Find out the 3 Disruptive ASX Small Caps here

Watch these ASX Small caps in 2021

Small Caps are exciting stocks to watch as they often operate in niche industries and are experiencing high growth.


It’s fascinating following a small cap as it takes its product or service out to a bigger audience and transforms itself into a big company. But making money is not just about picking winners. It’s also about taking profits to generate big gains. You need to recognise value and take profits to benefit from excess optimism as well as pessimism.

One of the most important contributors to returns is the price you pay. You could also add to this that you can’t live off paper profits and it’s important to take profits.

Click here to find out about these 3 ASX Small Cap Stocks to watch in 2021

We cover over 100 Small Caps that we have selected for their growth potential. If you’re looking for Small Caps to buy but finding it difficult to do the research and stock picking yourself, you can sign up and get started now. We have done all the hard work for you. Our analysts find the best stocks and tell you when to buy and when to sell.