The Benefit of Investing Into Small Cap Stocks

Small cap stocks (stocks whose entire market cap is less than $2 billion) can offer unique opportunities for wealth creation. They are far riskier, but they can be very beneficial. Large cap stocks and especially funds that hold large cap stocks represent a great way to build wealth over a long period of time in a relatively safe manner. They are smart investments, but I believe exposure to small cap stocks can be very beneficial as well. 

The main reason for this is return on investment opportunity. Apple has a market cap of around $3 trillion. If I put $1,000 into Apple stock, the company would have to become worth $30 trillion for me to 10x my money. I'm not saying Apple won't one day be worth $30 trillion but the chances are not great at all. Especially since the entire U.S. stock market is worth around $46 trillion. On the other hand, a company worth $2 billion becoming a company worth $20 billion happens all the time and is not that farfetched. 10xing one's investment in a $2 billion company is a lot more feasible.

Now, investing into small cap stocks is a lot riskier. There's a much higher percent chance of these companies going bankrupt. Large cap stocks are usually a much safer investment to make. Most finance professionals claim that most people should simply buy an S&P 500 index fund which invests into the 500 largest companies in the U.S. and that should be the only investing that they do. Most active investors do lose to this strategy.

That said, small cap stocks can lead to impressive growth. When I am looking at small cap stocks, I try to find ones that have very impressive growth, are trading at a reasonable valuation, and have great leadership. I find it hard to find stocks that fit all three of those categories, but when I do, I buy.

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