Smaller stocks, bigger opportunities? Here’s what to know

When people think about investing, it’s usually the largest, most familiar companies that come to mind. But there’s a broader universe of businesses beyond the big names. Smaller stocks, whether mid-, small- or micro-cap, can offer exposure to different parts of the market and provide another way to diversify a portfolio. They also tend to behave differently than large companies, which can bring both opportunity and risk.

Understanding the trade-offs is an important step in deciding how smaller companies can fit into a long-term investment plan.

What are mid-, small- and micro-cap companies?

Mid-, small- and micro-cap are terms used to describe the size of a company based on its market capitalization – essentially, the total value of its shares.

• Mid-cap companies are established businesses that are still growing. They often have proven business models and are expanding into new markets.
• Small-cap companies are typically younger or more niche businesses. They may be growing quickly and can offer strong potential returns.
• Micro-cap companies are among the smallest publicly traded firms by market value. They’re often in the early stages of development and may have significant room to grow.

Why consider smaller companies?

Smaller companies are often underrepresented in traditional portfolios, which tend to focus on large-cap stocks. But there are several reasons why mid-, small- and micro-cap companies deserve attention:

• More opportunities: There are far more small and mid-sized companies than large ones, offering a wider range of investment choices.
• Less coverage: Many of these companies aren’t followed closely by analysts, which means their stocks may be mispriced, creating opportunities for skilled managers to find hidden gems.
• Growth potential: Smaller companies can grow faster than large ones because they’re more agile and innovative.
• Diversification: Their performance drivers are different from large-cap stocks, which can help balance a portfolio.
• Valuation: Many are trading at attractive prices compared to large caps, which could mean better long-term value.

Including a mix of market caps in a portfolio can help investors benefit from different stages of business growth and risk levels. Smaller-cap companies may not be the biggest names, but they can play a big role in helping achieve long-term growth.

What role can smaller companies play in long-term investing?

Smaller companies can be valuable for long-term investors looking to capture growth early. Many start out in niche markets and expand over time, sometimes becoming tomorrow’s industry leaders. Because they’re often overlooked, they may offer attractive entry points and unique return potential. While they can be more volatile, their long-term upside can make them a useful complement to larger, more established holdings.

What is the advantage of active management?

Active management can be especially valuable when investing in smaller companies. Because many mid-, small- and micro-cap stocks receive less attention from analysts, skilled portfolio managers have more room to uncover mispriced opportunities. Active managers can also adjust portfolios based on changing market conditions, company fundamentals or emerging trends, helping investors navigate volatility and potentially improve long-term outcomes.

By looking beyond the large-cap companies, investors can uncover opportunities that add depth, diversification and growth potential to their portfolios.

To learn more, visit Fidelity.ca.