Some of today’s biggest stock market winners started small. Amazon traded for under $10 in the late 1990s. Tesla was once valued at just over $1 billion.
Small-cap stocks can be where tomorrow’s leaders are born.
But for every breakout success story, there are plenty of small companies that struggle or fail. Small caps can deliver impressive growth, but they also come with higher risk and sharper price swings.
Understanding how small-cap stocks work and whether they fit your goals is key before investing.
What are small-cap stocks?
"Small cap" is short for small market capitalization, which is equal to a company's share price multiplied by the number of shares outstanding. A company is generally considered to be a small-cap if its market cap falls between $300 million and $2 billion, though small-cap indexes hold stocks with market caps above $2 billion.
Top small-cap stocks to consider
Here are five small-cap stocks to consider. Not as a complete list, but as a starting point if you’re looking for smaller companies with meaningful growth narratives.
| Name and ticker | Market cap | Dividend yield | Industry |
|---|---|---|---|
| Magnite (NASDAQ:MGNI) | $1.9 billion | 0.00% | Media |
| Amplitude (NASDAQ:AMPL) | $1.0 billion | 0.00% | Software |
| Consolidated Water (NASDAQ:CWCO) | $547.0 million | 1.54% | Water Utilities |
| Sweetgreen (NYSE:SG) | $667.6 million | 0.00% | Hotels, Restaurants and Leisure |
| Serve Robotics (NASDAQ:SERV) | $793.2 million | 0.00% | Hotels, Restaurants and Leisure |
1. Magnite
NASDAQ: MGNI
Key Data Points
NASDAQ: AMPL
Key Data Points
NASDAQ: CWCO
Key Data Points
NYSE: SG
Key Data Points
NASDAQ: SERV
Key Data Points
Why investors like small-caps
Small-cap stocks attract investors for a few reasons. For one, smaller companies often have more runway -- it’s easier to double revenue from a smaller base than from a massive one. Small caps also tend to get less Wall Street coverage, which can create opportunities when a business is improving but still under the radar. And in strong economic expansions, small caps have historically delivered outsize gains.
The trade-off is that small caps can be bumpy. Earnings are often less predictable, financing costs matter more, and the stocks tend to swing harder when the market gets nervous. Since 2023, mega-cap AI stocks have dominated returns while many small caps lagged -- a reminder that patience and a long-term mindset matter here.
Small caps vs. large caps
Large-cap stocks have outperformed small caps over the past decade, driven largely by mega-cap tech leaders like Nvidia, Tesla, and Meta.
But that hasn’t always been the case. Historically, small caps have had periods of strong outperformance, especially when:
- Interest rates fall
- Economic growth broadens
- Investors rotate away from crowded mega-cap trades
Because leadership changes over time, many investors diversify across both rather than trying to pick a winner.
Should you invest in small-cap stocks?
If you are willing to hold an investment for several years and feel comfortable with the price of a stock fluctuating significantly, then small-cap stocks might have a place in your portfolio. Owning small-cap stocks can boost your portfolio's overall growth rate, provided you commit to a buy-and-hold investing strategy.
Remember, small companies are more likely to fail than large, established businesses, as we saw during the COVID-19 pandemic. It's important to do your research before investing in any small-cap stock. You can also lower your risk by investing in a small-cap-focused fund.
How to choose a small-cap stock
Small-cap stocks aren't a small corner of the stock market; they span all sectors. Many of the criteria you'd use for investing in general would apply to small-cap stocks, such as considering competitive advantage and growth rate, but there are some factors that apply specifically to small-cap stocks.
Small-caps tend to be more sensitive to economic cycles because they are more likely to be unprofitable or have large debt balances. Therefore, it's worth looking at the balance sheet and cash flow statements to ensure that the company can endure a recession.
You'll also want to consider the upside potential of the stock, and one way to do that is to look at the total addressable market the company is competing in. If it's a small, fast-growing company, especially one with a competitive advantage, in a large addressable market, that looks like a promising stock to own.
How to invest in small-cap stocks
If you're looking to invest in small-cap stocks, the process is as simple as buying any other stock. Just follow the following steps.
- Open your brokerage app: Log in to your brokerage account where you handle your investments.
- Search for the stock: Enter the ticker or company name into the search bar to bring up the stock's trading page.
- Decide how many shares to buy: Consider your investment goals and how much of your portfolio you want to allocate to this stock.
- Select order type: Choose between a market order to buy at the current price or a limit order to specify the maximum price you're willing to pay.
- Submit your order: Confirm the details and submit your buy order.
- Review your purchase: Check your portfolio to ensure your order was filled as expected and adjust your investment strategy accordingly.
Related investing topics
FAQ: Small-cap stocks
About the Author
Jeremy Bowman has positions in Chipotle Mexican Grill, Magnite, Sweetgreen, The Trade Desk, and Walt Disney. The Motley Fool has positions in and recommends Adobe, Alphabet, Chipotle Mexican Grill, Peloton Interactive, Serve Robotics, The Trade Desk, Uber Technologies, Walt Disney, and Warner Bros. Discovery. The Motley Fool recommends Magnite and Sweetgreen and recommends the following options: long January 2028 $330 calls on Adobe, short January 2028 $340 calls on Adobe, and short March 2026 $42.50 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
