ASX Small Caps: What They Are and How to Invest

Over the 15 years to June 2025, more than 85% of actively managed Australian share funds underperformed the S&P/ASX 200. Among mid and small cap funds, the figure was 58%, and the gap held across every period measured. That difference says something specific about ASX small caps: the segment is less efficient than the top of the market, so research and selection count for more. This guide explains what ASX small caps are, how they behave, the risks they carry and the ways investors can access them. 

What Are ASX Small Caps?

ASX small caps are listed companies that sit outside the largest 100 on the Australian Securities Exchange by market capitalisation. The most widely used benchmark is the S&P/ASX Small Ordinaries, which includes the companies in the S&P/ASX 300 that are outside the S&P/ASX 100. Below the ASX 300 sit microcaps: smaller, less liquid companies that make up most of the roughly 2,000 businesses listed on the ASX.

There is no fixed dollar threshold. The boundary moves with the market, so a company can enter or leave the small cap segment as its share price rises or falls.

Small Caps Trade on Less Information Than Large Caps

Large caps are covered by many analysts, held by most institutional portfolios and priced continuously by a deep pool of buyers and sellers. Small caps receive far less attention, and that difference shapes how they behave.

Growth runway. A company with $50 million in revenue can double in size from one new contract or market. A company with $50 billion in revenue cannot grow at that pace. This is why scalable small companies can compound faster than established leaders.

Volatility. Small cap share prices move further in both directions. Thinner trading means a single large buyer or seller can shift the price.

Liquidity. Many small caps trade small volumes each day, which affects how quickly an investor can build or exit a position.

Sector mix. The ASX small cap segment has a heavy weighting to resources and to early-stage companies that are not yet profitable. This makes the index more cyclical than its large cap counterpart.

“Investing in small caps can be exceptionally rewarding if one is capable of selecting growth opportunities before they are discovered by the broader market.”

Lower Coverage Is Where Mispricing Starts

When fewer analysts follow a company, its share price can drift away from the value of the business for longer. Strong results go unnoticed, or a temporary setback is priced as a permanent one. That gap is the opportunity in small caps, and it is the reason the SPIVA data above favours active managers in this segment more than in large caps.

Finding those gaps takes primary research: meeting management, testing the business model and reading the balance sheet closely. We cover how this works in practice in our articles on where to find undervalued opportunities in Australian small caps and identifying overlooked small-cap opportunities.

Most Small Cap Risks Show Up in the Balance Sheet

Small caps carry specific risks, and most can be identified before investing.

Cash burn and dilution. Companies that are not yet profitable often fund themselves by issuing new shares. Each raising dilutes existing shareholders, and a raising at a depressed price can turn a temporary fall into a permanent loss.

Debt. Small companies have less access to funding than large ones. Rising interest rates put pressure on indebted small caps first, while companies with net cash can keep investing through a downturn.

Concentration. Many small caps depend on one product, one customer or one key person. A single setback can change the investment case.

Liquidity. An investor may not be able to sell a large position quickly without moving the price.

A company with a strong balance sheet reduces most of these risks at once. For the smallest end of the market, Emanuel Datt sets out three red flags to avoid when investing in microcaps.

Three Ways to Invest in ASX Small Caps

Buying shares directly. Direct ownership gives full control and no management fee. It also requires the time and access to research each company properly, and a portfolio large enough to spread risk across many holdings.

An index ETF. A small cap ETF tracks an index such as the Small Ordinaries at low cost and with instant diversification. It holds every company in the index, including those that are unprofitable or carrying excessive debt, and it gives no protection when a weak company falls.

An actively managed fund. An Australian small cap fund relies on a manager’s research to choose which companies to own and which to avoid. Fees are higher than an ETF, and results depend on the quality of the manager’s process. Our guide on how to choose a fund manager in Australia sets out what to check.

The right route depends on how much time, capital and research access an investor has.

Portfolio Relevance

Small caps suit investors with a long time horizon who can hold through periods of price weakness. They add exposure to earlier-stage growth that a large-cap portfolio misses, but their volatility means position size matters. Most investors hold small caps as one part of an Australian equity allocation, sized so that a sharp fall in the segment would not force a change of plan.

Conclusion

ASX small caps are the companies outside the top 100 on the exchange. They offer a longer growth runway and receive less research attention than large caps, which creates mispricing that disciplined research can use. Their risks are specific and mostly visible in the balance sheet. Investors can access them directly, through an index or through an active manager.

To learn more about how Datt Capital researches and invests in ASX small caps, visit our Datt Small Companies Fund page or contact our Head of Distribution, Daniel Liptak, at 0419 004 524 or by email at daniel@datt.com.au.

Frequently Asked Questions

What is a small cap stock in Australia?‍

A small cap stock in Australia is a listed company outside the largest 100 on the ASX by market capitalisation. Companies ranked between 101 and 300 make up the S&P/ASX Small Ordinaries index.

What is the ASX small cap index?

The main ASX small cap index is the S&P/ASX Small Ordinaries. It includes companies in the S&P/ASX 300 that are not in the S&P/ASX 100.

Which is better, small caps or large caps?

Neither is better in every market. Small caps offer more growth potential and more volatility, while large caps offer stability and liquidity. Many investors hold both, with the balance set by time horizon and risk tolerance.

Why invest in small cap stocks?

Small caps provide exposure to companies earlier in their growth, many of which are not held in large-cap portfolios. Lower analyst coverage also means prices can depart from business value for longer, which creates opportunities for research-led investors.

Are ASX small caps riskier than large caps?

Small caps are more volatile and less liquid, and more of them are unprofitable. Risk varies widely between companies, and balance sheet strength is the clearest dividing line.

How do I invest in ASX small caps?

Investors can buy shares directly, buy an index ETF that tracks the Small Ordinaries, or invest through an actively managed small cap fund. Each involves a different trade-off between cost, control and research.