Small-cap stocks

Companies are grouped by market capitalisation, the share price multiplied by the number of shares, into large, mid and small caps, with micro caps below. There is no fixed cut-off: index providers set their own bands, often by ranking a market’s companies by size and labelling a slice near the bottom as small cap, so the thresholds shift with the market and differ between countries. A small company in the US can be larger than a big one in a smaller market. Small-cap indices usually contain many companies, each with a tiny weight.

Small caps offer exposure to younger or more specialised businesses, and academic research has found a historical ‘size premium’, although its strength and persistence are debated, especially once the poor performance of unprofitable small companies is taken into account. The costs are higher volatility, lower liquidity, wider bid-ask spreads and greater sensitivity to economic downturns and borrowing costs. Many broad indices, such as the MSCI World, leave out small caps altogether, so investors who want exposure often use a dedicated small-cap fund.