The benefits of investing in small-cap companies for long-term growth

Published on: Wed Mar 08 2023

The benefits of investing in small-cap companies for long-term growth

Small-cap companies typically/usually have a market capitalization ranging from $300 million to $2 billion. Although small-cap companies are not as well-known as their larger counterparts, they can offer investors a variety of advantages, particularly in terms of long-term growth potential.

In this blog, we'll look at some of the most important advantages of investing in small-cap companies for long-term growth.

High Growth Potential

Because they are typically/generally in the early stages of development, small-cap companies often have greater growth potential than larger companies. They may have innovative products or services that can take market share away from established players, or they may operate in rapidly growing industries.

Because of their small size, small-cap companies can be more nimble and responsive to market changes. They can adapt to new trends and technologies more quickly, allowing them to stay ahead of the curve.

Higher Returns

Over the long term, small-cap stocks have historically outperformed large-cap stocks. According to an Ibbotson Associates study, small-cap stocks returned an average of 12.1% per year from 1926 to 2018, while large-cap stocks returned only 9.9%.

This outperformance can be attributed in part to the higher growth potential of small-cap companies, as previously discussed. However, this is also due to the fact that small-cap stocks are frequently overlooked/ignored by institutional investors, who prefer to focus on larger companies. This can lead to market inefficiencies, allowing small-cap stocks to be undervalued and allowing investors to generate higher returns.

Diversification Benefits

Investing in small-cap stocks can help a portfolio's diversification. Small-cap stocks frequently/commonly have low correlations with large-cap stocks, which means they can help reduce overall portfolio risk.

Furthermore, small-cap stocks can provide exposure to a broader range of industries and sectors than larger companies. Small-cap companies, for example, may be focused on emerging technologies or niche markets that are underrepresented in the large-cap universe.

M&A Potential

Small-cap companies are frequently appealing acquisition targets for larger corporations seeking to acquire/obtain new technologies, products, or market share. Small-cap stocks may be acquired at a premium, providing investors with an additional potential source of returns.

Furthermore, even if a small-cap company is not acquired, the prospect of being acquired can help to support the stock price. This is due to the possibility that potential acquirers will begin to accumulate shares in the company, increasing demand and creating a positive feedback loop.

Access to Management

Investing in small-cap companies can give you more access to management. Because small-cap companies are often less closely followed by analysts and investors, management may be more willing to engage with shareholders.

This access may give investors a better understanding of the company's operations, growth prospects, and management team. Additionally, it can allow investors to advocate for changes or improvements within the company, potentially increasing shareholder value.

Conclusion

In summary, investing in small-cap companies can provide a range of benefits for investors seeking long-term growth. Small-cap stocks have historically outperformed large-cap stocks, and they can provide diversification benefits and access to high-growth industries and emerging technologies.

Furthermore, small-cap companies may be attractive acquisition targets, and investing in them can provide investors with greater access to management. However, it is important to remember that investing in small-cap stocks can also be riskier than investing in larger companies, as small-cap companies may be more vulnerable to economic downturns or other market conditions.

As with any investment, it is important/crucial to conduct thorough research and due diligence before investing in small-cap companies. However, for investors willing to take on some additional risk, small-cap stocks can provide an attractive avenue for long-term growth potential.

Returns are subject to market risk.

Past performance do not assure future returns.

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