EasyEquities Blog

Investing in start-ups - 'cheap companies'

Written by Cay-Low Mbedzi | May 10, 2022 7:05:24 AM

Start-ups and cheap companies 

Start-ups, or so-called “cheap companies”, are some of the investment vehicles that, despite the risk, may be rewarding in the long run, especially when they become profitable.

But where are such companies identified 🕵️‍♂️?

Considering that these companies have little to no income, their share price is usually low. This typically depends on how many assets the company owns, or the demand for shares. Examples of such companies may include mining exploration companies, among others.

Discover some exploration companies and start-ups below

Start-ups

Exploration company

 

With the risks and rewards of companies trading at low prices, a share price alone may not always reflect that a company is a start-up. In some cases, a share price may be low due to dilution or poor performance.

Long term investing?

In the process of growth, companies considered start-ups might continue to burn cash in the process. This may result in long-term debt over months, if not years. And because expansion also requires capital, a listed start-up may resort to the issue of shares for cash to raise money for development.

Examples here include cannabis and gold start-ups.

Cannabis

Gold

Sometimes when a company changes focus, it could result in the disposal of assets, depending on the decision of the board and size of the disposal. Such actions may result in a dividend payout to shareholders 😌 despite a low share price. After all, it's your company, right?

Seeing profits from operations is only likely to take place in the medium to long term. In terms of dividends, EasyVSTRs may be in a position of greater returns, provided the company is a start-up with a low amount of shares at issue and a substantial net profit. This is the case because profits are divided into each share.

Such companies are more likely to receive tender offers from private investors than their competitors are, especially when the potential clients see promise in the company's future earnings. Such an offer may be at a premium to investors - a factor that contributes to the volatility of start-ups when positive news hits the market. In some instances, political, environmental, social, technological, legal and economic (PESTLE) factors may cast the company in a favourable light – for example, the recent cyber security and lithium-related events.

Cyber security

Lithium

 

In the case of delisting or a tender offer, investors may be given the option to choose whether to remain shareholders (in an unlisted environment) or sell their shares at a specified price.

Volatility game 📊

Because of the trades that occur as people either offload or rebalance their investment portfolios, a stock with a low share price may be highly volatile. Dilutive events during the process may present an opportunity to buy the dip, together with market sentiments and news.

It’s important to understand that start-ups do not have as much exposure because of their financial and operational size and value. These companies may experience low liquidity and less movement before gaining traction from large institutional investors as they continue to expand and grow, securing space on the target lists of large investors, and maybe even other companies.

And just like a group of people – maybe five, six or even more – coming together to start investing, with EasyEquities' no minimum, your piece of the pie is dependent on your contribution. 📊

Learn more on how to start investing in your favourite company(s) at no minimum here or below.