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 legal instrument that grants certain privileges and that, as a rule, can be bought or sold. Here are some examples of securities: 

Treasury bill
Guaranteed Investment Certificate (GIC)
Savings bond
Shares
Etc.
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 legal instrument that grants certain privileges and that, as a rule, can be bought or sold. Here are some examples of securities: 

    Treasury bill
    Guaranteed Investment Certificate (GIC)
    Savings bond
    Shares
    Etc.
    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

Your investor profile

What is your risk tolerance? If you have little tolerance for risk, the securities of small cap companies may not be right for you.

Do you have the financial means to be patient? Developing and marketing an idea, however good it may be, and making a profit from it can take a long time. If you think you’ll have to resell your securities quickly, this type of investment is not suitable for you.

Do you have time to research the investments and make sure they suit you? If you want to invest in small cap companies, you will need to devote time and energy to gathering information.

If you are prepared to take risks and to invest part of your money in a small cap company, invest in a business whose industry you are familiar with. You will be better able to assess its chances of success.

Do your homework before investing

Here are some important questions to ask before investing in a small cap company:

  • Does the company have a proven track record?
  • Did you find reliable information about it?
  • Does the company have any income?
  • Is it profitable?
  • How long has it been in business?
  • What is the profile of its managers?
  • Who are the Board members?
  • What is their background?
Insight

Enterprise register

You can consult the enterprise register This link will open in a new window to find out the names of the directors, officers and principal shareholders of a company that carries on business in Québec.

You can also contact the company or the business itself, which can provide you with the names and addresses of the Board members upon request.

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  • Does the company offer products and services that will be in demand in the coming years? Does it operate in a very competitive sector?
  • How will the company finance its activities? Will it issue other securities? If it does, the value of your investment could decrease.
  • Have you read the company’s financial statements? Is it financially sound enough to successfully deliver on its expansion plans? Does it have cash assets? Does it have a lot of debts?
  • Must the securities purchased be accompanied by 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.  
    ?

If the securities you are buying are not traded on an exchange, you may have to keep them for an indefinite period of time. The legal structure of the company could also be more complex. Who are the company’s shareholders? Is there a shareholders’ agreement? What are the features of the issued shares?

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