Stock Market Misconceptions: Keep an Eye on Small Capitalized Stocks

3 Common Investment Misconceptions in the Stock Market

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

Myth 1: Large-Cap Stocks Always Perform Better

A commonly heard misconception in the markets is that large-cap stocks are always more successful than small-cap stocks. However, since 2000, the Russell 2000 index, which tracks small-cap stocks in the US, 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 More Risk

It is true that small-cap stocks have higher volatility, but this does not always mean they carry more risk. By combining these stocks with a portfolio of large-cap stocks, you can reduce your risk profile. MSCI data shows that having a portfolio with 85% large and 15% small-cap stocks provides the same level of risk compared to solely investing in large-cap stocks.

Myth 3: Investing in Small Stocks is Dangerous

Small-cap stocks possess a significant potential that often goes unnoticed. Recent data indicates that as investors are drawn to small stocks, these stocks gain value and can compete with larger ones. This presents a way to diversify your investment strategy and enhance your long-term returns. Small-cap stocks offer serious return potential for investors looking for quality and undervalued opportunities.

Conclusion

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