The Benefits and Risks of Small-Cap Investing

Investing in small-cap companies can be a great opportunity for individual investors with limited capital. Small-cap stocks, or stocks of publicly-traded companies whose market capitalization ranges from $300 million to approximately $2 billion, can offer significant upside growth potential and unique investment opportunities.

One of the primary advantages of investing in small-cap stocks is the potential for high growth. According to Victory Square, small-cap companies are often innovating and bringing new products and services to the market, which can foster high growth. Additionally, The American Association of Individual Investors (AAII) writes that small-cap stocks have historically outperformed large-cap stocks with an average annual return of 11.6% versus 10.3%. Not bad.

Another benefit of investing in small-cap companies is the opportunity for increasing dividend payments. Talk Business says small companies can provide investors with a unique opportunity as the company continues to grow into a mature business. Dividend payments can be a great measure of a company's growth or success.

However, it's worth noting that investing in small-cap companies also comes with increased risk. Fidelity tells us that mid to small-cap companies tend to be riskier investments than large-cap companies. They have greater growth potential and tend to offer better returns over the long term, but without the resources of larger companies, they are more vulnerable to negative events such as the pandemic, which can make them more volatile.

There are a number of famous investors and investment funds that focus on small-cap stocks. Some notable examples include:

Charles Royce is well known as one of the pioneers of small-cap investing. According to Forbes, Royce founded Royce Associates in 1972 and now manages in excess of $32 billion in assets through his eponymous Royce Funds. Royce is known for his expertise in small-cap investing and his funds have a long-standing track record of success in this area.

The Brown Capital Management Small Company Fund is a mutual fund that focuses on small-cap stocks. Morningstar says the fund has an impressive long-term track record of outperformance and is well-diversified across various sectors, which makes it a great option for small-cap investors.

Dr. Henry Ma, president of Julex Capital Management, is a well-respected investment advisor and ETF expert, who focuses on small-cap, cyclical stocks. According to Investors Business Daily, Dr. Ma believes that small-cap stocks can offer investors attractive returns, especially when the economy is recovering. He suggests investing in ETFs that track the Russell 2000 index, which is made up of small-cap companies.

Oberweis Micro Cap Portfolio is a mutual fund that focuses on small-cap companies with strong growth potential. Zacks reports this fund is managed by experienced investment professionals who have a track record of identifying and investing in promising small-cap companies. This fund is suitable for investors who are looking for high-growth, small-cap stocks. However, keep in mind that mutual funds can be very risky for multiple reasons and that's why some investors steer clear of them.

In summary, investing in small-cap companies can be a great opportunity for individual investors with limited capital. These stocks can offer significant upside growth potential and unique investment opportunities, such as increasing dividend payments. However, it's important to keep in mind that investing in small-cap companies also comes with increased risk. As always, it is important to research and consult with a financial advisor before making any investment decisions.