Small-cap stocks, which can be considered the engine of growth in the stock market, are intrinsically more volatile than their larger counterparts. Historically, small-cap stocks have outperformed large-cap stocks when the markets are in an upward trend and have responded more quickly to economic downturns. As traditional large-cap indices test overbought conditions, investors looking for growth opportunities might want to consider the benefits of small-caps.
The potential for larger returns from small-cap stocks is an attractive draw for many investors. Small-caps are by suppliers in a wide variety of industries and offer exposure to a more diversified asset base than large-cap stocks. Small-cap stocks also often offer greater potential for capital appreciation, since their market capitalization is lower, making it easier for them to quickly gain traction and appreciate in value.
Small-cap stocks could be part of a strategy designed to diversify a portfolio and reduce the risk associated with investing. By diversifying, investors can reduce the risk associated with a single holding or a sector. Small-cap stocks can also add diversity to a portfolio as they tend to perform differently from large-cap stocks.
In addition to offering higher upside potential than their large counterparts, small-cap stocks may also offer more value when the markets are overbought and when the risk of a downturn is increased. Small-cap stocks typically take less of a hit during periods of economic uncertainty, as investors often see them as a safe-haven asset. This can prove invaluable for investors looking to preserve capital during turbulent markets and can provide a buffer against possible losses.
Small-cap stocks can sometimes be looked over in favor of more well-known stocks, but their potential rewards shouldn’t be underestimated. When properly managed and allocated to the right level, small-caps can boost a portfolio’s returns while reducing risk. With large-cap indices testing overbought conditions, now may be the perfect time to take advantage of the potential rewards small-cap stocks offer.