Small-cap stocks often represent the vestige of hope for many long-term investors. Long viewed as a high-risk-high-reward investment option, small-caps have provided investors with significant upside potential and the potential for higher returns on average. As major indexes like the Dow Jones Industrial Average (DJIA) and the S&P 500 (SPX) reach(ed) overbought conditions, small-caps have been left to shoulder the brunt of the market volatility.
The case for small-cap stocks is a compelling one. As larger businesses are often more established and have already reached their peak growth potential, smaller businesses are at an advantage when it comes to innovation and faster growth. This of course partially explains why smaller-cap stocks tend to move faster than their larger counterparts.
At the same time, many analysts and experts suggest that as long as the market is in an overbought state, small-cap stocks are an attractive option. Not only can investors benefit from the higher returns associated with them, small-caps may also provide investors with greater security. Sarwa Invest, for example, outlines that “the undervaluation of small-caps tends to cushion them more”, allowing investors to miss out on much of the downside risk associated with overbought conditions.
On the other hand, there also appears to be a downside to investing in smaller-cap stocks. Many analysts caution that as these stocks tend to move faster, investors can be caught off guard when the market moves against them. Furthermore, smaller companies often lack the resources of their larger peers, and may be unable to sustain growth or profits.
Overall, it appears that the case for small-cap stocks is still compelling, even under overbought conditions. Their higher returns, potential for innovation and faster growth, and possible downside protection make them an attractive option for many investors. Still, investors should always ensure that they have access to up-to-date research and financial guidance before investing. Ultimately, with careful consideration and research, small-caps can be a powerful tool in achieving both long-term and short-term financial objectives.