Historical data and research has shown us time and again that small cap stocks are your best bet when it comes to growing your investment portfolio. Although your investment strategy should be diversified among other asset classes, small caps should definitely play a big role in your portfolio.
Small caps are companies that have a market capitalization of less than $2 billion. The market cap is calculated by multiplying the outstanding shares by the stock price. This measures the market value of the company. In other words, it answers the question, how big is a company or how much is it worth?
These small companies have the best potential for growth. There are several very obvious reasons for this. First of all, they simply have more room to grow than a large company.
For a large cap company with tens of hundreds of billions of dollars worth of market to grow even just 8% a year is a tremendous feat. But for a small cap to grow that much would be considered underperforming.
Essentially with small caps, you are looking for the next Google or Microsoft. The great thing about this category of stocks is that they are usually pretty cheap. That means if you lose on 5 stocks but make it big on just 1, it may be well worth it in the end.
If you don’t want to pick individual stocks, you can invest in small cap funds that would follow this strategy for growth. There are plenty to choose from. And if you go index fund or ETF’s, the fees you pay will be minimal.
Or, you can just chuck this whole idea and just go for growth funds in general. These funds look for fast growth no matter where they find it. But most likely, much of their portfolio will be filled with small caps. Very rarely will you find a large cap in these types of funds.
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