As major U.S. stock indexes surge to highs not seen since the dot com days, it’s easy to understand why so many investors are getting cautious. The S&P 500 and Nasdaq Composite indexes are both considered to be overbought, meaning that they’ve been trading far above their average valuations. It’s no surprise then that investors are hesitant to jump into the market and capitalize on the rally that stretched over the past few months.
However, for those investors willing to take on some additional risk, small-cap stocks present an opportunity. While these stocks might not offer as much monetary upside as their larger counterparts, they do offer some unique benefits that larger companies don’t share.
One benefit of investing in small-cap stocks is diversification. Small-cap stocks are inherently less volatile than their larger counterparts, as they offer a hedge against broader market movements. This makes them ideal for diversified portfolios, as they can act as a buffer against the negative effects of market volatility.
Another benefit of investing in small-cap stocks is the potential for growth. Small-cap stocks are generally seen as having higher growth potential than larger companies because they are smaller and less established. This means that investors can capitalize on their potential earlier, allowing for higher returns.
Finally, small-cap stocks often offer the potential for higher dividends. Since it is common for large companies to pay lower growth dividends, small-cap stocks can offer investors the opportunities for substantially higher growth through dividend payments.
With stock markets testing overbought conditions, now may be the perfect time to consider investing in small-cap stocks. Not only do they offer investors the benefit of diversification and potential for growth, but they can also be part of a sound dividend strategy. Small-cap stocks may not be the obvious choice, but they may be the best option for investors looking for a lucrative investment opportunity.
