Which should you prefer- Small Cap or Big Cap stocks?

One of the most common questions that new investors face is, if one should be focusing on small cap or big cap stocks. While there are no right or wrong answers, it is generally better to invest in small cap stocks. There are a few reasons as to why the focus should be on small cap stocks instead of the bigger ones.

People have always been debating whether small cap stocks is a better investment as compared to big cap stocks. Over the years, research has been done and interestingly, small cap stocks actually outperformed the big cap stocks in the long run. This should not be a surprise for a number of reasons. First, by focusing on small cap stocks, you will be able to generate a higher return on your  investments. The reason is simple. Based on a 400% growth rate, it is a lot harder to grow a business from 10 billion to 40 billion. But, it is a lot easier for a business to grow from 5 million to 20 million. This is a distinct problem faced by many big cap companies. As investors, you want the company to grow. This is because you can then reap the profits along with the companies’ growth. In short, it is easier for you to get a higher return when you invest in small cap stocks as compared to ploughing your money in the bigger ones.

Another big advantage that small cap stocks over big cap stocks is that small cap stocks are, obviously, cheaper. The fact that small cap stocks are smaller in market capitalisation means that there will be lesser institutional investment in the smaller companies. This is because, if institutional fund were to be poured into a small cap stock, they would be buying the company rather than owning a small stake.

Therefore, small cap stocks are always under the radar which is why they are a lot cheaper than big cap stocks. As investors, you certainly can take advantage of this by buying more with less. This is why small cap stocks are preferred and recommended for new investors.

Click here for government certification in Accounting, Banking & Finance