Shares of smaller companies are sometimes volatile and risky, but they can provide great opportunities. Here's how to find themSmall-cap stocks can swing wildly from one day to the next. A small company's growth plan can be derailed by a bad CEO, a recession, or one product that bombs. And it's hard, sometimes impossible, to find good objective analysis of small companies.
With these disadvantages, many investors stay away from small-cap stocks. They stick with large- and mid-cap stocks, generally those with market values greater than $1 billion, because bigger companies usually offer investors predictability and more safety. Closely watched by the media and Wall Street analysts, larger stocks are easy for amateur investors to follow.
What's more, the past year has been tough on small caps, as credit worries and a slowing economy put an end to a great seven-year run for smaller stocks. For the 12 months ending Apr. 30, the Standard & Poor's SmallCap 600 index was down 9%, while the large-cap S&P 500 index fell 4.7%. However, the small-cap index outperformed large caps over the past five years (14.7% vs. 10.6% for the S&P 500) and over 10 years (7.4% vs. 3.9%).
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