Do Small-Cap Stocks Offer Greater Growth Potential Than Large-Cap Stocks? #226
The S&P 500 is having another stellar year, yet small-cap stocks—representing the smallest publicly traded companies in the United States—haven't performed as well. While this might seem like a downside, it can also present unique opportunities for investors. In this episode, we’ll dive into the pros and cons of investing in small-cap stocks, the potential growth they offer, and how you can get started.
You will want to hear this episode if you are interested in...
[0:51] Should you consider investing in small-caps?
[1:59] What are small-cap stocks?
[3:28] Pros and cons of small-cap stocks
[5:00] The growth potential of small can stocks
[7:03] Why is there a projected turnaround?
[8:23] How do you invest in small-cap stocks?
[11:17] How to invest in value stocks
What are small-cap stocks?
What are small-cap stocks? According to Investopedia, “A small-cap stock is a public company whose total market value is between $250 million to $2 billion.” Some people include companies up to $5 billion in small-caps. If you invest in small-cap stocks, you’re looking to invest in up-and-coming companies you expect to grow at a fast rate.
Large cap stocks—which have a market capitalization of $10 billion or higher—offer more stability than smaller companies (as well as dividends) and are doing business globally. They likely don’t have as much growth potential.
Pros and cons of small-cap stocks
Pros: Small-cap stocks offer substantial growth potential and tend to have lower share prices. Many of these companies partner with other businesses, allowing for diversification across industries. Because they’re less popular and not as widely held, there’s also the potential for appreciation as more investors take notice. Furthermore, most large funds can’t invest in small-cap stocks, which can keep competition lower.
Cons: Small-cap stocks are often more volatile, with prices that can fluctuate significantly. The lower share price can also mean lower demand, as fewer investors may be attracted. Due to their size, small-cap companies can be more vulnerable to economic shifts and, in some cases, risk bankruptcy.
The growth potential of small-cap stocks
According to A Wealth of Common Sense, historically, small-cap stocks have outperformed large-cap stocks in several periods. For instance, between 1926 and 2021, small-caps returned an average of 11.9%, compared to large caps' 10.35%.
Most of this outperformance occurred from 1975–1983, a period when pensions were first allowed to invest in small-caps, driving significant inflows. Excluding that period, the performance of small-caps versus large caps has been quite close.
However, over the last decade, large caps have outpaced small-caps. From 2014–2023, large-cap stocks posted a cumulative return of 130%, while small-caps returned 83%. In 2024 year-to-date, large-cap stocks are up 23% compared to a 12% increase in small-caps, suggesting potential for future growth.
Why is there a projected turnaround?
A large company will pay a lower interest rate when they borrow money. Smaller companies find it harder to secure funding. That’s why small-cap stocks tend to do better when interest rates are going down, which is slowly happening.
So how do you invest in small-cap stocks? Listen to hear what I personally use for my money and my clients.
Resources Mentioned
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