Some of the best stocks to buy in the past 25 years started as small-cap stocks. Amazon (AMZN 1.43%) was a $7 stock in 1998, and Tesla (TSLA -0.52%) had a market valuation of just over $1 billion in 2010.
Of course, not every small-cap company becomes a giant. Investing in small companies can be rewarding, but it also comes with risks that investors need to understand. Here's a close look at small-cap stocks, including our picks for some of the best.
Definition
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 classified as having a small market capitalization when its market cap falls between roughly $300 million and $2 billion. Stocks classified by market capitalization are generally divided as follows:
| Category | Market Capitalization |
|---|---|
| Micro-cap companies | Less than $300 million |
| Small-cap companies | $300 million to $2 billion |
| Mid-cap companies | $2 billion to $10 billion |
| Large-cap companies | $10 billion to $200 billion |
| Mega-cap companies | More than $200 billion |
Small-cap companies are often young companies. They tend to have significant growth potential but are generally less stable than their larger, more established peers. They are often unprofitable.
However, a comparison of the small-cap-focused Russell 2000 index and the large-cap-focused S&P 500 shows that small-cap stocks have outperformed large-cap companies since 2000. Yet large caps have narrowed the gap significantly as artificial intelligence (AI) has become more widely adopted. The chart below demonstrates the difference:
Over time, small-cap stock prices tend to be more volatile than those of larger companies, and stock values fluctuate more dramatically. Typically, small caps outperform in bull markets, but the recent one has been different. Thanks to the AI boom that began around 2023, large-cap tech stocks have paced the stock market's gains, while small-cap stocks have underperformed, in part due to high interest rates.
Small caps have also fallen sharply amid concerns about tariffs and trade wars, showing again that they're more volatile than their large-cap peers.
Best small caps
Best small-cap stocks to buy right now
Many small-cap companies aren't household names -- at least, not yet. Here are some small-cap stocks to consider:
1. Magnite
Magnite (MGNI 0.68%) is a supply-side digital advertising platform formed by several mergers and acquisitions. The company has established itself as a leader in video and connected TV (CTV) advertising, or ad-driven streaming, catering to online publishers and streaming platforms like Walt Disney (DIS -0.94%), Fox (FOX 0.16%), and Warner Bros. Discovery (NASDAQ:WBD).
Magnite partners with The Trade Desk (NASDAQ:TTD) and other adtech companies to manage publisher inventory efficiently and keep its technology up to date. The company could also benefit from the recent ruling finding Google to have a monopoly in adtech. While its growth has moderated since the COVID-19 pandemic boom, Magnite still has a lot of potential growth ahead of it and remains the CTV leader for supply-side adtech.
2. Amplitude
Amplitude (NASDAQ:AMPL) is a leader in digital product analytics. The company's software allows businesses to see how customers interact with their apps and websites so they can make improvements and learn what works and what doesn't.
For example, Amplitude helped guide Burger King's "Whopper Detour" campaign. It also showed Peloton (NASDAQ:PTON) how social engagement was key to getting its customers to stick with its workouts.
Like other software stocks, Amplitude struggled in the aftermath of the COVID-19 pandemic as many of its customers restructured their contracts. But the company has moved past that churn. It's seeing improving growth, especially in remaining performance obligations, a proxy for backlog.
Amplitude also launched a new suite of AI agents in June 2025, which could help accelerate its growth. Those included a website conversion agent, an onboarding agent, and a monetization agent. The company has built out its product suite and looks poised to grab market share from Alphabet's (GOOG 1.46%)(NASDAQ:GOOGL) Google Analytics and Adobe (NASDAQ:ADBE) Analytics, the category leaders. If Amplitude can fulfill its promise, the stock could move a lot higher from here.
3. Consolidated Water
Utilities come in all shapes and sizes, so it shouldn't be surprising to find a water utility on this list. Consolidated Water (NASDAQ:CWCO) specializes in desalination, which could become a big trend in the coming years as water supplies around the world are stretched and more coastal and tropical communities turn to desalination.
The company is currently focused on the Caribbean market, with several plants in the Cayman Islands and the Bahamas. That's helped it deliver strong growth in recent years, outperforming its water utility peers. The trend should continue as it capitalizes on the desalination opportunity and water scarcity becomes a greater problem.
4. Sweetgreen
Sweetgreen (NYSE:SG) is the leading fast-casual salad chain and has a ton of growth potential, considering it had just 251 locations as of the first quarter of 2025.
While the company has yet to deliver significant profits on the bottom line, Sweetgreen has a high average unit volume, or average sales per unit, of $2.9 million, on par with industry leaders like Chipotle (CMG 1.01%).
The company is also investing in an automated system it calls the Infinite Kitchen, a robotic assistant that helps put together orders faster, increasing throughput and saving on labor costs.
Sweetgreen is expanding its base at a rapid clip with plans to add 40 new restaurants in 2025, and the company has significant growth potential over the long term, as the company is aiming to reach at least 1,000 restaurants. Founder Jonathan Neman believes it could reach several thousand locations over the long term.
5. Serve Robotics
One potentially disruptive small-cap stock worth following is Serve Robotics (NASDAQ:SERV), a maker of food delivery robots. Serve is still a development-stage company with a revenue run rate of less than $2 million as of Q1 2025.
The company was spun off from Uber (UBER -0.88%) in 2021 and still counts it as a major investor. Its delivery robots collaborate with the Uber Eats platform, delivering restaurant orders from chains like Shake Shack (NYSE:SHAK).
Though Serve Robotics is still a small company, it's growing rapidly. Revenue was up 150% in the first quarter of 2025. While Serve Robotics is a high-risk stock, it's the kind of business with the upside potential that makes small-cap stocks attractive.
Best funds
Best small-cap funds
If you don't want to choose individual small-cap stocks for your portfolio, you can instead gain exposure to small-cap companies by investing in a small-cap-focused exchange-traded fund (ETF) or mutual fund. Here are a couple of options:
- iShares Russell 2000 ETF (NYSEMKT:IWM): This ETF tracks the performance of the Russell 2000, which is considered the leading index of small-cap stocks. The fund's managers charge an annual management fee of 0.19%, which works out to $1.90 for every $1,000 invested.
- Fidelity Small Cap Growth Fund (NASDAQMUTFUND:FCPG.X): This mutual fund invests in small-cap stocks with high growth potential. It's actively managed, with the objective of outperforming the Russell 2000, so the fund's fees (0.94% annually) are somewhat high compared to most ETFs.
Looking forward
Small-cap stocks in 2025
Small-cap stocks have largely underperformed in the bull market that began in early 2023, with the bulk of the gains going to "Magnificent Seven" stocks like Nvidia (NASDAQ:NVDA). However, investors expect the bull market to eventually broaden, with small caps catching up to large caps.
We saw a hint of this in July 2024 before broader economic concerns pushed stocks lower again, and once again in the post-election rally that faded. Small-cap stocks should also benefit from falling interest rates, which have begun to come down as of mid-2025.
After the pullback, the Russell 2000 still trades at a significantly lower price-to-earnings (P/E) ratio than the S&P 500. This could eventually drive small caps' outperformance as investors look to capitalize on their value.
Small caps vs. large caps
Over the last decade, large caps have outperformed small caps by a considerable margin. That's largely due to the outperformance of the "Magnificent Seven," especially during the recent AI era. The largest companies on the stock market, like Nvidia, Tesla, Meta Platforms (META 1.7%), and others, have all delivered strong or even exceptional returns over the last decade, which has favored large caps over small caps.
Let's review the advantages and disadvantages of each stock type.
Advantages of small-cap stocks:
- Allow for more upside potential, in general.
- Outperform in bull markets, in general.
- Offer a wider range of diversification.
Disadvantages of small-cap stocks:
- Tend to underperform in bear markets.
- Vulnerable to high interest rates.
- More volatile.
Advantages of large-cap stocks:
- Less volatile/safer.
- Less downside in bear markets.
- More exposure to AI, for now.
Disadvantages of large-cap stocks:
- Less upside in bull markets, historically.
- More concentration in a handful of stocks.
- Less upside if interest rates come down.
Related investing topics
Should I invest?
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.
