Before you invest in a small or medium-sized business (SMB), take the time to find out about the features, risks and potential return of the investment.

SMBs are generally defined based on annual revenue and number of employees. Businesses with fewer than 500 employees and annual revenue of less than $50 million are considered SMBs.

SMBs that list their securitiesA security is a financial asset issued by a company or a government that grants interests in a business or in a debt obligation and that can be bought or sold.
Here are some examples of securities: 
Treasury billGuaranteed Investment Certificate (GIC)Savings bondSharesEtc.
on a stock exchange are generally considered small cap companies.

Potential advantages of investing in small cap companies

For the most part, the largest and most profitable publicly traded businesses or companies were originally SMBs. The growth potential of an emerging business may be greater than that of a large, well-established company.

Generally, emerging businesses or companies can adapt more easily to new technologies and develop new markets more quickly than larger ones.

The value of their securities may increase significantly, but that comes with a risk.

Disadvantages of investing in small cap companies

Before you invest, consider the following information:

  • The securitiesA security is a financial asset issued by a company or a government that grants interests in a business or in a debt obligation and that can be bought or sold.
    Here are some examples of securities: 
    Treasury billGuaranteed Investment Certificate (GIC)Savings bondSharesEtc.
    of small cap companies are considered high-risk and very volatile investments, as their value can fluctuate considerably. Although these securities are listed on a stock exchange, they may be difficult to resell quickly.
  • Not all small cap companies succeed in marketing their products or services, and some may have to rethink or cease their activities. If they are no longer able to pay their debts, they could be compelled to enter into an arrangement with creditors or even go bankrupt.
  • Plenty of information and analyses are available about large companies. This is not always the case with small cap companies. Their securities tend to be traded less frequently and are followed less closely by financial analysts.
  • Companies listed on the TSX Venture Exchange must provide:
    • Financial statements
    • A prospectusA prospectus is a detailed information document that a company must prepare to be able to sell securities (such as shares) to the public.
      It must provide full, true and plain disclosure of all material facts likely to affect the value or market price of the security in question.  
      (generally, for shares issued to retail investors)
    However, it is your responsibility to search for additional information.
  • The officers and directors of small cap companies may have less experience than those of large companies. The management and control mechanisms of emerging companies are generally less developed.
Warning

Small cap: Big return?

Market capitalization is the number of sharesA share, also referred to as stock, is an equity security that entitles you to an ownership interest in a company.
The company can distribute a portion of its earnings to shareholders by paying them a dividend.
The shares of companies listed on an exchange are bought and sold at the exchange.
When a company ceases to operate, the proceeds from the sale of its assets are used to pay its debts and taxes, and the rest of the money is distributed to shareholders.
 outstanding multiplied by the share price. It’s the price that you would have to pay if you were to buy 100% of the company’s shares at their current value.

Most listings on the TSX Venture ExchangeThe TSX Venture Exchange is an exchange that specializes in venture capital in Canada. are securities of small cap companies. An investment in this type of “emerging business” is also called a “venture capital” investment.

You could earn solid returns by purchasing securities of small cap companies listed on the TSX Venture Exchange. But you could also lose a lot of money, or even your entire investment.

End of the warning
Warning

In case of bankruptcy

In the case of an arrangement with creditors or in the case of bankruptcy, shareholders’ claims will be paid after the company’s creditors have all been paid. If a company becomes insolvent, it will probably not have enough assets to repay all its creditors so shareholders will very likely lose their entire investment.

End of the warning