Why Investing in Small-Cap Stocks Could Lead to Significant Gains for Savvy Investors

The world of investing offers a wide array of options, but smaller market capitalization corporations often get overshadowed by deep-pocketed titans. These companies, with market caps typically ranging from $300 million to $2 billion, rarely make headlines in large financial publications. Most institutional investors therefore will look past them, a preference for the safety of large cap stocks. But, conversely, the fact that nobody is thinking about this space allows your average retail investor to take full advantage of Small-Cap Stocks.

The Unfair Edge in Small-Cap Stocks

Small-cap stocks are the hidden gems of stock investing. This is in contrast with some of the larger companies like Microsoft or Apple who have already passed their greatest growth phases — but Small-cap companies, being in their infancy – still haven’t peaked by a long shot! These characteristics of future growth are what make small-caps so enticing. Although large-cap stocks have already matured to the point where doubling or tripling in size is nearly impossible, their Small-cap counterparts are still at a very early stage.

Any investor that could identify the right small-cap stocks before they attract a following would make outsized returns. Because of the possibility that these companies grow quickly, they are attractive to speculators looking for hidden growth opportunities.

The Role of Small-Cap ETFs in Risk Management

Small-cap ETFs (exchange-traded funds) offer a more diversified and tamper-proof option for small-caps at least on the surface, beyond which lies lesser volatility. Both of these ETFs bundle a large number of small-cap companies, spreading the risk across multiple individual firms. Consider using their actively managed counterparts for more targeted exposure. 

A small-cap ETF could be one way for other investors to tap into the growth prospects of markets in this part of South America without going all-in on a single country. ETFs such as the iShares Russell 2000 ETF or the Vanguard Small-cap offer diversified exposure to small-cap stocks, so investors may pick spot one of that growth without bearing all those risks. These may be particularly appealing for people who want to profit from the rise in small-cap stocks but don’t lose sleep over selecting individual winners and losers.

Embracing Volatility for Potential Rewards

Small-cap investing is not for the impatient. But also that volatility is what scares institutional investors and quick price swings are uncomfortable even for the most experienced of investors. The risk to small-cap stocks is that their lower market capitalization means they can experience more significant changes in price often with less rationale, as herd mentality continues its dominance of short-term performance.

But volatility allows for large rewards as well. The bottom line on leaps for the stock investor is surely to maintain a long-term view and understand that short term swings are part of owning Small-caps. Although it may be a bumpier ride than investing in large-cap stocks, the opportunity for huge gains can easily balance those out.

Why Playing It Safe Might Limit Your Portfolio

While it may be tempting to just invest in known and stable companies like Microsoft or Apple, those moves are growth restricting. Even worse as you get bigger, there is less new business opportunity because these top firms will have fairly mature solutions. In several senses, they are the victims of their own success—profitable but not entirely exciting for investors in search of massive returns.

On the other hand, small-cap shares are earlier in their life cycle and there is substantially more upside to gains. Investing in small-caps, if you’re willing to accept more risk than large-cap alternatives, might be your ticket to massive portfolio expansion. Small-cap investing can provide remarkable capital appreciation prospects through the potential to invest in a firm before broader recognition, an attractive option for investors seeking outsized investment returns.

The Bottom Line

Small-cap companies offer regular folks a rare opportunity to beat the market — this is because they’re just tiny ones, and could very easily see explosive gains if things turn out well. Although investing in small-cap stocks or ETFs does come with considerably more risk given their volatility, the chance to invest early on a future market leader is an enticing reason to diversify your portfolio. When you tilt your portfolio toward these stocks, embracing the volatility but focusing on their long-term potential. Indeed, you might be surprised with the returns that you unlock for investing in small-cap companies.