Should I Buy Small Companies Stocks?

There is one very tempting reasons indeed to answer the question which we posed in the title of this article in the affirmative and that is the undeniable fact that smaller companies have, throughout history outperformed their larger rivals, at least when the results are analysed over the long term. When we state the fact so blandly then it seems almost obvious that we should all invest in smaller companies, all of the time. After all, why do anything else when these companies all do better for themselves and for their investors in the long haul? Like most questions of this sort, though, the obvious answer is not always a reliable one. We should consider at least three other matters before we come to the firm conclusion that smaller is always better.

The first thing to bear in mind is that proviso about the long term. In the short term small-cap stocks are by their very nature more risky than the kind you get from large-cap. From this, it follows naturally that small-cap stocks and more volatile and again as a result, when the market panics, it is the small-cap stocks that get sold off first. This is a very important factor to bear in mind of you are the sort of investor who worries. Small-cap stocks do well in the long term for investors who hold their nerves. If you know that you are not such a person, then be honest with yourself and save some money in the process!

The converse to this is that growth can also be very fast indeed, and the reasons for this are fascinating though somewhat outside the scope of a basic article of this kind. It is sufficient for the moment to state that profits of over 500 or 600% can be achieved by the person who invests in the right company at the right time. Of course this is far from being the case with most small companies. The key is for the investor to find the right one. There is much advice around but yet again remember what we said earlier: if it was easy to find a company that is bound to perform well, then everyone would do it.

The last point in this short article is concerned, in a way, with our first point; large-cap is much more likely to pay you dividends. If these are important for you then you might want to look away from small-cap concerns, where they are much less common. If on the other hand, dividends are added extras for you, pleasant but not essential, then you will not likely be put off by this difference. In the end the answer to the question which we asked at the start of this article is one only you can really answer.

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