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Investors salivate over the biggest companies in the market — the likes of Apple, Google and Amazon — but where’s the love for the market’s perpetual underdogs: small-cap stocks?
When these investments do get some time in the limelight, it’s often for unflattering reasons — violent price swings or fraudulent activity, for example. Small caps can diversify portfolios and bring higher growth potential — albeit with higher risks.
What are small-cap stocks?
Small-cap stocks are company shares with market values between $250 million and $2 billion, though that range isn't universal. "Cap" is shorthand for market capitalization, or the total number of a company’s shares multiplied by its current stock price.
The definition of small when it comes to stocks is subjective. The Russell 2000 Index, the first benchmark of small-cap stocks, is the best-known gauge. The market caps of its member companies currently range from about $240 million to $6 billion. The other major indexes tracking these stocks — the Standard & Poor’s SmallCap 600 and the MSCI USA Small Cap Index — include U.S. companies with even broader ranges of market caps.
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Best small-cap stocks, ordered by one-year performance
Below is a table of the seven best-performing stocks that are listed on major U.S. exchanges and have a market cap under $10 billion, ordered by one-year returns.
Ticker | Company | Performance (1 Year) |
|---|---|---|
ROOT | Root Inc | 1523.54% |
ALAR | Alarum Technologies Ltd ADR | 1322.05% |
SLNO | Soleno Therapeutics Inc | 1225.22% |
CVNA | Carvana Co. | 1094.81% |
SWVL | Swvl Holdings Corp | 1070.94% |
ZJYL | Jin Medical International Ltd | 898.69% |
ALPN | Alpine Immune Sciences Inc | 762.35% |
Source: Finviz. Stock data is current as of market close on April 30, 2024, and is intended for informational purposes only.
Small caps historically have a relatively high correlation — meaning they tend to move in lockstep — with large-cap stocks. But which group is performing better than the other over a given time frame fluctuates regularly, based on factors such as macroeconomic growth and politics.
Why small-cap stocks are risky
As small-cap businesses expand, their stocks offer a higher growth potential compared with larger companies. But that comes with a greater risk of volatility — including more (and bigger) fluctuations in stock prices and earnings reports. This trade-off is known as the risk premium.
Small-cap stocks can also be more fertile territory for fraudulent activity.
Why small-cap stocks are mighty
The sheer number of small-cap stocks means there’s a plethora of options for investing in them. What’s more, the proliferation of exchange-traded funds has made it easier to buy a basket of stocks with a specific investing strategy — growth or value, for example. Small caps can be an underappreciated — or even overlooked — way to add diversification to your portfolio.
Why small-cap stocks are not that different
It’s important to know what makes small-cap stocks distinctive, but you shouldn’t necessarily obsess over the differences. They have a lot in common with the others that might be in your portfolio: They trade on exchanges, their prices are published intraday, Wall Street analysts write research reports about them, and by virtue of being public, these companies must disclose a wealth of information to investors.
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