To turn a modest sum of money like £500 into £5,000 from investing in shares, you need to pick the right investments. It’s possible to achieve a 1,000% return with a tracker or a portfolio of income shares, with patience and good stock picking.
However, to increase the odds of ten-bagging, I think small cap stocks is the place to look.
Investing in shares which can grow quickly – and what I’d avoid
When I talk about smaller shares I’m not talking penny stocks – I’d define it more as those with a market cap between £50m and £250m. I want to avoid the very smallest and therefore riskiest companies. A 50% loss on an investment means a 100% gain is needed just to get back to breakeven. That’s achievable, but difficult to do consistently.
It’s better to just try and reduce your odds of making the big loss in the first place. So I invest in smaller caps with a long-term mindset and ask: do I really want to hold a small part of this company?
This is about investing in high-quality stocks that happen to have low market capitalisations. Probably because they are small, growing businesses, or they have been previously mismanaged.
What’s good about small cap shares?
Thre are numerous benefits, but among the most important is greater inefficiency in the market. That’s because institutional investors, like the banks and pension funds, do less research on smaller-cap companies. As a result, there are more opportunities to buy undervalued shares.
On top of that, small caps can more easily double in size. It’s easier to grow from being worth £50m to £100m, for example, than it is to go from £50bn to £100bn.
Thirdly, smaller companies can generally be more agile and in many cases will have founders retaining significant shareholdings. This often makes them more entrepreneurial.
A high-risk/high-reward share I have my eye on
The healthcare artificial intelligence (AI) company RenalytixAI (LSE: RENX) is a share that I think has huge potential. Through its KidneyIntelX platform, it provides in vitro diagnostics focused on optimising clinical management of kidney disease.
This is a huge market it’s targeting in the US. There it’s awaiting approval from the Food and Drug Administration (FDA) for its tests. Once approved these will be sold at $950 apiece. Then the company should go from no revenue to very fast growth.
If the FDA decision comes back against the company, or there is a delay in getting approvals, I’d expect the share price to fall. So there’s a real risk with this share. Especially as at the moment it has no other revenues.
Looking long-term, though, I think AI will make big inroads in the healthcare industry over the next decade. I hope, and expect, that RenalytixAI will be a part of that growth.