In search of all those would-be Microsofts

A Smaller Quoted Company (SQC) is a term used by the City to describe a company that is valued at less that £100 million on the UK stockmarket. You will find the majority of SQCs on the FTSE Small Cap and Fledgling indices. Each one contains companies valued at over £50 million and under £50m respectively. You will probably also have heard of the Alternative Investment Market or AIM, a relatively new market place created to give young companies the chance to raise money without having to show a track record and conform to the regulations of the main stock market. It is often regarded, along with the FTSE Small Cap and Fledgling indices, as containing more risky shares, and private investors should exercise a greater level of caution when investing in such companies.

Why invest in SQCs? Everyone dreams of investing in a small company that turns out to become the next Microsoft. However, a more realistic view of a good performing SQC would see it grow steadily over time, providing a good return on any initial investment. And whilst spectacularly performing shares come up from time to time, they are often few and far between, and you might lose more money than you gain in your quest to find the big one. However, with careful research, SQCs can provide the private investor with good returns.

A particular advantage to the private investor is that many of the big institutions and banks will not invest in SQCs until they are valued at a certain arbitrary level (say £100 million), so many smaller shares can often be undervalued and poorly researched. As big institutions finally buy into these growing companies, it often results in a rise in their share price. Continued growth may also push the company into a new, less speculative index, resulting in its shares being bought up by the big tracker funds. This again may push up the share price further. The trick then is to get in first.

Before investing in SQCs, private investors should make sure they already have a sensible, balanced portfolio. It would be unwise to have a portfolio weighted heavily with SQCs, as they are potentially more volatile and need to be monitored more closely than the 'blue chip' companies.

Before investing in SQCs, it is important to understand the risks. Smaller companies tend to be more susceptible to market forces. For instance, they are likely to be hit harder by rising interest rates or press comment than a larger company.

Similarly, selling by investors can also have a strong negative effect on the share price. Sometimes SQCs can also be difficult to buy and sell, as there may be fewer brokers actually dealing in them. This clearly is a two-fold problem, as it may make it difficult to buy when the share price is rising, and difficult to sell when the share price falls. As you would expect, this is often more likely when trying to sell, and many investors have found themselves in possession of SQC shares that they have been unable to sell at a time of their own choosing.

One indication of this lack of liquidity, as it is known, is the difference between the bid and offer price of the share; the "bid" being the selling price and "offer" being the buying price (remember, the price most commonly quoted in the press is the "middle market" price, not necessarily the price at which you would buy or sell). If this difference, known as the spread, is wider than average it may indicate that the share is traded infrequently, so it is always best to check first with your stockbroker.

For a full list of UK stockbrokers and the services they offer, contact the Association of Private Client Investment Managers and Stockbrokers (APCIMS) on 0207-247 7080 or click info@apcims.co.uk

For further information on investing in equities, contact ProShare, the body that encourages wider share ownership, on 0171-394 5200 or click www.proshare.org.uk