Small-Cap Stock

Companies are often grouped by size, measured by market capitalization: share price multiplied by the number of shares. Small-cap companies sit at the lower end of this range. The exact boundaries vary between markets and index providers, and they change over time as markets grow.

Small-cap companies are often younger, more focused businesses with room to grow. Some become much larger over time, delivering strong returns to early investors.

For example, a small-cap company might be a specialist manufacturer or a regional retailer that is growing quickly but is still a fraction of the size of the industry's leaders.

Small-cap stocks tend to be more volatile than large-cap stocks. They may have less diversified businesses, less access to financing and more sensitivity to economic downturns. Their shares are often traded less frequently, which can make them harder to buy or sell without affecting the price.

Research suggests small-cap stocks have at times outperformed large-cap stocks over long periods, a pattern called the size premium, but the effect has been inconsistent. Many investors include small-cap funds as part of a diversified portfolio.