{"id":11120,"date":"2022-01-28T07:49:57","date_gmt":"2022-01-28T12:49:57","guid":{"rendered":"http:\/\/staging-prblog.paladinregistry.com\/blog\/?p=11120"},"modified":"2025-08-27T02:02:19","modified_gmt":"2025-08-27T06:02:19","slug":"small-cap-stocks-for-balanced-portfolio-2022","status":"publish","type":"post","link":"https:\/\/www.paladinregistry.com\/blog\/investing\/small-cap-stocks-for-balanced-portfolio-2022\/","title":{"rendered":"How Small-Cap Stocks Might Affect Your Portfolio in 2022"},"content":{"rendered":"\n<p>Companies can be\nclassified based on revenue, size, and even market cap. Market capitalization\nis calculated by multiplying the number of shares in the market with the\ncurrent stock price of the shares. Investors often refer to a company&#8217;s market\ncapitalization to decipher its valuation compared to its peers. <\/p>\n\n\n\n<p>Small- mid-and large-caps are categories for stock allocation according to the market capitalization of the respective companies. Blue-chip or large-cap stocks are shares of large companies. The market capitalization of large-cap companies ranges from $10 billion and higher. Small-cap stocks are shares of companies with a relatively small market capitalization, ranging from $300 million to $2 billion. <\/p>\n\n\n\n<p>This type of\ncategorization, however, can be misleading to investors if they make their\ninvestment decisions solely based on this differentiation. Many investors tend\nto believe that fortune favors large-cap stocks and that the way to gain\nconsiderable and sustained returns is by investing in large-cap stocks. Another\ncommon misconception is that small-cap stocks are only associated with start-up\ncompanies. In contrast, small-cap companies could be well-established\ninstitutions that are just small in their market size, and by virtue of that,\nhave greater potential to deliver returns than some large-cap companies.\nAssumptions as discussed above, which are widespread among traders, can make\nthem miss opportunities to earn high returns. <\/p>\n\n\n\n<p>Today&#8217;s traders need to be aware of the growth potential of small-cap stocks. Small-cap stocks usually belong to growth companies that are expanding aggressively and have the potential to earn the status of large-cap companies in the future. In addition, small-cap stocks are available at lower valuations, thus making them ideal for growth investing. If you\u2019re an investor exploring suitable investing strategies to grow and manage your portfolio, <strong><a href=\"https:\/\/www.paladinregistry.com\/landing\/find-financial-advisors?cta=match\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"consult a financial advisor\">consult a financial advisor<\/a><\/strong> for further information and guidance.<\/p>\n\n\n\n<p>Let us explore\nsmall-cap stocks in detail. <\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_68_1 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69d3dafc760a1\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69d3dafc760a1\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.paladinregistry.com\/blog\/investing\/small-cap-stocks-for-balanced-portfolio-2022\/#What_are_small-cap_stocks\" title=\"What are small-cap stocks?\">What are small-cap stocks?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.paladinregistry.com\/blog\/investing\/small-cap-stocks-for-balanced-portfolio-2022\/#There_are_many_advantages_of_investing_in_small-cap_stocks\" title=\"There are many advantages of investing in small-cap stocks:\">There are many advantages of investing in small-cap stocks:<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.paladinregistry.com\/blog\/investing\/small-cap-stocks-for-balanced-portfolio-2022\/#How_can_small-cap_stocks_affect_your_portfolio_in_2022\" title=\"How can small-cap stocks affect your portfolio in 2022?\">How can small-cap stocks affect your portfolio in 2022?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.paladinregistry.com\/blog\/investing\/small-cap-stocks-for-balanced-portfolio-2022\/#How_do_small-caps_perform_during_inflation\" title=\"How do small-caps perform during inflation?\">How do small-caps perform during inflation?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.paladinregistry.com\/blog\/investing\/small-cap-stocks-for-balanced-portfolio-2022\/#How_can_you_invest_in_small-cap_stocks\" title=\"How can you invest in small-cap stocks?\">How can you invest in small-cap stocks?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.paladinregistry.com\/blog\/investing\/small-cap-stocks-for-balanced-portfolio-2022\/#To_sum_it_up\" title=\"To sum it up\">To sum it up<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_small-cap_stocks\"><\/span><strong>What are small-cap stocks?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>By definition, a\nsmall-cap stock is a share of a company with a total market capitalization\nvalue ranging between $300 million to $2 billion approximately. Small-cap\nstocks tend to outperform the benchmark indices given the growth potential they\nhave in catching up with the large-cap stocks. Thus, small-cap investors are\nconstantly on the lookout for young companies that show signs of fast growth\nover the years. Investors seek to invest in these small-cap stocks that can\nbecome future large-cap companies and thus, gain significant capital gains. <\/p>\n\n\n\n<p>Although\nsmall-cap stocks are a good investment alternative for those seeking quick\ncapital appreciation, investors should keep in mind that these stocks are prone\nto high volatility. They tend to react to market news and factors faster than\nother stocks due to their smaller share base. They can therefore be at higher\nrisk during the downtrends or the low phases of the market. Small-cap stocks\nwould be best suited for investors with a high-risk tolerance, looking for\nshort-term returns. However, risk-averse investors need not completely ignore\nthese stocks if there are quality picks among them. Investors may always\ncushion the risks by including less volatile assets in their portfolios. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"There_are_many_advantages_of_investing_in_small-cap_stocks\"><\/span><strong>There are many advantages of investing in small-cap stocks:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<ol class=\"wp-block-list\">\n<li>They have a greater potential for future growth compared to their large-cap counterparts. This presents the investors an opportunity to lock in higher capital gains in the future.<\/li>\n\n\n\n<li>There is a possibility that small-cap stocks are quality stocks but are fair-priced or low-priced because they are under-recognized by the public due to market inefficiencies. Thus, these are good picks for value and growth investing alike.<\/li>\n\n\n\n<li>Small-cap stocks are generally low-priced. This makes it affordable to the retail investors and enables them to purchase larger quantities of the stocks selected which may increase their earnings potential over time.      <\/li>\n\n\n\n<li>Large institutional investors are bound by certain regulatory limitations to the quantum of exposure they can take in small-cap stocks. This prevents these stock prices from being artificially inflated due to the selling or buying pressures.<\/li>\n<\/ol>\n\n\n\n<p>Small-cap\ninvestors, in return, earn an upper hand by being able to avail themselves of\nthe small-cap stocks at relatively fair prices. But a major disadvantage\nassociated with small-cap stocks is that they carry a higher risk compared to\nlarge and mid-cap stocks. Also, these stocks are less liquid as their trade\nvolumes are not that high. <\/p>\n\n\n\n<p>Therefore,\ntraders must undertake in-depth research and analysis to find small-cap stocks\nworth investing in. <strong><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_can_small-cap_stocks_affect_your_portfolio_in_2022\"><\/span><strong>How can small-cap stocks affect your portfolio in 2022?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The U.S economy\nis surely recovering well from the economic blow it faced due to the covid\npandemic in 2020. That said, it is still not free from supply chain bottlenecks\nand labor shortages. This explains the reason behind low-profit margins amongst\nmost companies. <\/p>\n\n\n\n<p>Generally,\nsmall-cap companies are domestic companies, so the impact of any economic or\nfiscal challenges that the country encounters is observed in their balance\nsheets. The effect of hurdles is more gruesome for small-cap companies than\nlarge-cap businesses. <\/p>\n\n\n\n<p>While economists\npredict lower prospects of growth in 2022, given the aftermath of the pandemic\neffect on the economy, small caps could witness low returns from businesses.\nBut they should still not be cut out from your investment portfolio simply\nbecause they now stand a chance at greater profits as the markets recover\nacross the globe. The U.S small-cap index has been observed to outperform the\nS&amp;P 500 index whenever economic growth accelerates. Therefore, it might be\nbetter to invest in small-cap stocks for the longer term in the current\nscenario. <\/p>\n\n\n\n<p>In any case, it\nis advisable that you invest only after consulting your financial advisor. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_do_small-caps_perform_during_inflation\"><\/span><strong>How do small-caps perform during inflation?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Inflation and\nincrease in interest rates reduce profit margins, but at the same time, they\nare signs of a strong economy. If the market expects the U.S economy to perform\nbetter than global trends, then increasing small stock exposure in your\nportfolio could prove to be profitable. On the other hand, exposure to\nsmall-cap stocks might lead to losses since they are more vulnerable to price\nchanges than large and mid-caps. The total valuation of the Russell 2000 (the\nindex that includes the smallest 2000 U.S companies by market capitalization)\nis around $6.7 trillion. In contrast, the total valuation of Apple alone comes\nup to $2.3 million. This proves that small-cap stocks will be more prone to\nvolatilities in case of high volumes of inflows and outflows in the capital\nmarket. <\/p>\n\n\n\n<p>Meantime, weaker\neconomies tend to have lower interest rates, and inflation levels may or may\nnot accurately reflect the strength of an economy. Knowing this, we can\nconclude that small-cap stocks would largely perform better when the central\nbank announces an accommodative stance on the monetary policy and underperform\nwhen the economy is faced with external pressures. <\/p>\n\n\n\n<p>Small-cap stocks\nare more sensitive to future growth prospects of the economy than interest rate\nvariations. The small caps will likely underperform if the interest rates fall\ndue to an impending economic slowdown. But, once the interest rates hit bottom\nand the economic cycle turns positive, the performance of small-caps tends to\nimprove. <\/p>\n\n\n\n<p>If inflation is\nfairly stable and the economy shows good signs of growth, investors could\nconsider investing in small-cap stocks. <\/p>\n\n\n\n<p>The S&amp;P\nSmallcap 600 gained 1.4% on average when the economy was experiencing\ndeceleration and only 0.5% on months with high inflation growth. A similar\ntrend has been shown by the Russell 2000 index, which gained 1.3% on average in\nmonths with low inflation but only 0.4% during months of accelerating\ninflation. <strong><\/strong><\/p>\n\n\n\n<p><em>[See: <\/em><a href=\"https:\/\/www.paladinregistry.com\/blog\/personal-finance\/protect-wealth-from-inflation\/\"><em>How to Protect Your Wealth From Inflation<\/em><\/a><em>]<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_can_you_invest_in_small-cap_stocks\"><\/span><strong>How can you invest in small-cap stocks?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Before investing\nin small-cap stocks, the primary thing to consider is your risk tolerance.\nGiven their high volatility and low liquidity, they are highly risky\ninvestments. Alternatively, you may opt to invest in Exchange Traded Funds\n(ETFs) that track small-cap stock indices to ensure diversification and reduce\nsingle stock concentration risk. This may help minimize the overall risk to\nyour portfolio to some extent.<\/p>\n\n\n\n<p>Also, note that\nsmall-cap stocks can help balance a heavy-weighted portfolio and aid increase\nyour overall gains in exchange for some additional risk. Large-cap stocks, by\nvirtue of their inherently large market capitalization, react much less to\nmarket news and are mostly stable behemoths. This means the stock price of\nlarge-cap companies may move, albeit slowly. Small-cap stocks, on the other\nhand, react fast due to the fewer number of shares in circulation and therefore\nwitness quick price appreciation (downfall too!). A mix of large-cap and\nsmall-cap stocks may be a good way to asset allocation to create an efficient\nstock portfolio that gives slow, stable returns through large caps and capital\nappreciation through small-cap stocks.<\/p>\n\n\n\n<p>Investors could\nopt for some fundamentally strong small-cap stocks or even ETFs or small-cap\nfunds targeting value stocks with low leverage and favorable sentiment. In the\nlong run, the returns from small caps tend to outperform big-caps, so an\ninvestment horizon ranging from five to ten years may be necessary to\ncomfortably earn a satisfactory level of return. <\/p>\n\n\n\n<p>Investors with a\nsuitable risk appetite may target to allocate 10% to 15% of their portfolio\namount towards small-cap shares. In conclusion, investors may consider\ninvesting in small-cap stocks with a long investment horizon in mind. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"To_sum_it_up\"><\/span><strong>To sum it up<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Small-cap stocks\nare shares of listed small-cap companies that have a market capitalization of\nless than $2 billion. They are characterized by high volatility and low\nliquidity that gives them the highest potential for good rewards but also makes\nthem highly risky investments. <\/p>\n\n\n\n<p>Small-cap stocks\ntend to react instantly to market news and economic factors, unlike large-cap\nstocks that are stable and react less. <\/p>\n\n\n\n<p>After judging\nthe current scenario of high inflation levels and high-interest rates in the\nmajority of the economies across the globe as they come out of the Covid-led\npandemic, it may be best not to expect too much from market returns in the\ncoming year. Inline, the segment of the small-cap stocks may also see the\nimpact of slower business recoveries and taper tantrum &#8211; a scenario where the\neconomy and markets react adversely to the Government slowly withdrawing the\nsupport it had extended during the tougher times (like the relief packages).\nAlso, looking at the recent surge of the Omnicron virus in Europe and other\neconomies, the global economic environment might suffer pressures which might\nagain lead to underperformance on behalf of small-cap stocks. Nevertheless, the\nmarkets are always unpredictable. It may be advisable for investors to not\nremove small-cap stocks from their existing portfolios as they may give\nmarket-beating returns once the economies get back on their track of economic\nrecovery and growth. Investors can also consult their financial advisor before\nbuying into the small-cap stock to know if it&#8217;s the most suitable investment\nstrategy for their financial needs.<\/p>\n\n\n\n<p><em>Looking to connect with a qualified financial fiduciary to effectively plan your investments? Use <a href=\"https:\/\/www.paladinregistry.com\/landing\/find-financial-advisors?cta=match\" target=\"_blank\" rel=\"noreferrer noopener\"><strong>Paladin Registry\u2019s free advisor match tool<\/strong><\/a>, answer a few questions and get matched with 1-3 fiduciaries suited to meet your unique financial needs. You may also set up a free initial consultation with them before deciding to hire one.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Companies can be classified based on revenue, size, and even market cap. Market capitalization is calculated by multiplying the number of shares in the market with the current stock price of the shares. Investors often refer to a company&#8217;s market capitalization to decipher its valuation compared to its peers. Small- mid-and large-caps are categories for stock allocation according to the market capitalization of the respective companies. Blue-chip or large-cap stocks<\/p>\n","protected":false},"author":126,"featured_media":11122,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[395],"tags":[],"class_list":["post-11120","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v23.3 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>How Small-Cap Stocks Might Affect Your Portfolio in 2022<\/title>\n<meta name=\"description\" content=\"Small-cap stocks are shares of listed small-cap companies that have a market capitalization of less than $2 billion.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.paladinregistry.com\/blog\/investing\/small-cap-stocks-for-balanced-portfolio-2022\/\" \/>\n<meta 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