Should You Consider Investing in Small Cap Stocks?

Investors who don’t recognize the big performance potential of small-cap stocks could be missing investment opportunities.

Small-cap stocks are those with a relatively small market capitalization, which is a measure of a company’s size. It’s calculated by multiplying the number of shares by the current market price.

Defining the small-cap universe has been challenging for the investment community. Several indices have been established to measure this market segment, including the Russell 2000 Index, the S&P Small-Cap 600 Index and the Wilshire Small-Cap Index.

When it comes to the average market capitalization, however, each index is different, so there’s no clear definition of just what range of market capitalizations a stock has to fall into to be a small-cap stock.

Although small-cap companies are clearly diverse, they do share some characteristics that may make them appealing to investors. They tend to be stocks of growing companies. Also, their size can allow them to react more quickly to changes in the economy than larger companies can.

These characteristics help explain why small-cap stocks have traditionally performed well as the economy is emerging from a downturn. Indeed, this tendency to perform well when other asset classes are not performing well is one of the best reasons to invest in small-cap stocks: They offer diversification.

Of course, small-cap stocks aren’t without risks. It can be harder to find buyers for these stocks, so it may take some time to sell your shares when the economy or markets perform poorly. Your advisor can explain more.