why do small caps outperform large cap stocks?

Answer 1

They do not always outperform large caps, but they certainly have during recent times.

One reason is this. Large caps in general do not grow any faster than the economy as a whole because they are the economy. Small cap stocks on the other hand do have the potential for more growth.

Answer 2

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Answer 3

That is broad general statement that is not always true. However, small caps typically have higher growth rates than many large cap stocks. They are also less liquid than large caps and have higher risk. When the economy is moving up and interest rates are low, investors will go toward small caps and will likely go to more sound, more liquid stocks when the market is moving sideways or down. During these times, large caps represent better value, pay a dividend and haven't had some of the upward moves that small caps have had.

Answer 4

There are really two reasons:

1. Small caps typically can grow faster than large caps because they have their growth in front of them and not behind them.

2. There is less analyst coverage of small cap stocks and less information available. This gives the investor the opportunity to get an edge. Also, as more analysts cover a stock, the value tends to go up. It is almost impossible to get an edge with a company like Microsoft or Exxon Mobile.

Answer 5

Some other points other than what was already mentioned are that microcaps are undiscovered which can lead to gains by 1)Being discovered - mutual funds that have not owned the stock now start buying a stock that is somewhat illiquid 2) Since not many people or funds own or know about the stock when the market gets hit they don't go down much since those that own the stock don't care what the market does. Many companies in the $2 to $12 range have almost no mutual fund holders and almost no sell side coverage. If the company make more money each year, it will be discovered.

Answer 6

Small caps have more risk involved because they're start-up companies that are in a growth and building mode. The risk you take with small caps is that many DON'T succeed. The ones who survive show much greater growth as a genre than do the large caps, which are companies who long ago went through most of their growth, and are now established, therefore usually pretty stable and with less potential for growing.

Answer 7

That conventional wisdom is based on studies of AVERAGES over LONG periods of time. Individual small caps may or may not outperform individual large caps. When a portfolio of SCs does outperform, it is usually due to its higher risk level (beta). In fact, after risk adjustment, much of the performance differential goes away.

Answer 8

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Answer 9

They didn't from 1996-2000

Answer 10

One explanation is because they are smaller and more innovating companies in their growth phase versus the large cap companies that are huge companies maintaining a slower growth rate.