Small caps irked by poor liquidity

Smaller companies keen to boost their liquidity face a problem: low trading levels are often exactly what puts off prospective new buyers. For many, the result is tiny turnover and a frustratingly low share price.

This problem was highlighted recently by a survey from the Quoted Companies Alliance (QCA) and business adviser BDO.

In a poll of small and mid-cap companies, 60 per cent say their growth plans are being held back by the capital markets.

Of these companies, 76 per cent say a lack of liquidity is the principal reason for this.

‘I don’t think it’s anything new, but it has got considerably worse over the past 12 months,’ says Simon Courtenay, executive director of Broker Profile, a London IR consultancy.

‘Many institutions, given there is so much volatility in the markets at the moment, are simply sitting on their hands.’

What can be done?

So what can companies do to help improve the situation? Chris Searle, corporate finance partner at BDO, advises companies to sell down more shares in the IPO, bring in more private clients through private client stockbrokers and maintain an active IR campaign. 

‘Positive news flow will encourage other investors to come in, hence increasing the share price and increasing liquidity,’ Searle says.

He cautions against expecting too much from junior trading venues like the UK’s Alternative Investment Market (AIM), however. 

‘[AIM] is basically a market for growth capital, not for shareholders to buy and sell,’ he explains.

[Article by Tim Human, Inside Investor Relations]

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