Stock Market Misconceptions: Pay Attention to Small Capital Stocks

3 Common Investment Misconceptions in the Stock Market

While investing in the stock market, some misconceptions you may encounter can lead to significant losses. In this article, we will focus on three common myths that often plague investors' minds. We will particularly clarify the performance differences between large-cap and small-cap stocks.

Myth 1: Large-Cap Stocks Always Perform Better

A common misconception in the markets is that large-cap stocks are always more successful than small-caps. However, since 2000, the Russell 2000 index tracking small-cap stocks in the U.S. has often provided higher returns than large-cap stocks. Additionally, the S&P 600 index, which includes only profitable small companies, offers a more reliable benchmark.

Myth 2: Small Stocks Carry Higher Risk

It is true that small-cap stocks tend to be more volatile, but this does not necessarily mean they carry more risk all the time. You can reduce your risk profile by combining these stocks with large-cap stocks in your portfolio. MSCI data shows that having a portfolio with 85% large-cap and 15% small-cap stocks provides the same level of risk as investing solely in large-cap stocks.

Myth 3: Investing in Small Stocks is Dangerous

Small-cap stocks have a largely overlooked potential. Recent data indicates that as investors turn towards small stocks, these stocks have gained value and are shown to compete with large-cap stocks. This presents a way to diversify your investment strategy and enhance your long-term returns. Small-cap stocks carry significant return potential for investors looking for quality and undervalued opportunities.

Conclusion

Capitalizing on the potential of small-cap stocks can create a robust investment strategy. History has proven how successful these investments have been in the past.