Small companies have appeal but also risk

Article Excerpt

Smaller companies can generate higher returns than their larger counterparts, but they are often riskier and less liquid, and may underperform for long periods. Small stocks are also more volatile in times of unsettled or falling markets. Still, if you focus on the best-quality small companies— or ETFs that hold those stocks—they can be a worthwhile addition to a well-balanced portfolio. Do small companies have an edge? Small companies trading on U.S. stock exchanges are typically defined as having market caps between $300 million and, say, $2 billion. That range is generally higher than for many other markets, including Canada. For the most part, index providers define small stocks as the companies that form the bottom 5% to 15% of the market value of the investment universe. While smaller companies do not have the scale and influence of big-cap stocks, they can sometimes react more quicker to changing market conditions. They may also have less internal bureaucracy to deal with before making decisions. In…

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