When investing your money there are endless types of investments you can purchase. Small cap stocks are just one of those choices. Your investment objectives will determine the investments you need to hold in your portfolio.

For the growth portion of your investment portfolio small cap stocks are an excellent addition. Small cap stocks have shown a better rate of return over the long haul than large cap stocks (your well know Microsoft's and Walmart's). For $1 invested in the 1920's, small cap stocks have returned $2,843 by the 1990's whereas large cap stocks have returned $8111 . The risks are higher but the rewards are greater.

However, as with most investments it will be better to have a diverse mixture of small cap stocks. In this way the winners we more than make up for the losers.

We have given you a brief overview of small cap stocks. Now we will give you some of the reasons why small cap stocks generally outperform the better known large cap stocks.

Basic economics tells us with the supply/demand curve as demand increase and supply stays the same then the price of the item will generally increase until equilibrium has been reached. This theory is one of the reasons to invest in small cap stocks. In the world of investing the big players, mutual funds and investment firms usually cannot invest in the small cap stock since there are not enough shares trading in the quantities that they generally purchase. Over time the successful small cap stocks start to grow and they reach a point where they become large enough for the big players to start purchasing. This is where the supply/demand theory kicks in. The large purchases made by mutual funds and brokerage house push up the demand for a stock while the number of shares available is limited, thus pushing the price up.

Another reason to invest in small cap stocks is related to their exposure to the investment community. Brokerage houses and investment firms are recommending shares in companies to their clients all the time. To do this they carry out extensive research on the companies they might want to recommend to their clients. However for this to be profitable for the brokerage firm the recommendation must have enough shares trading for the client to buy sufficient quantities to generate large commissions.
This underexposure presents opportunities to the individual investor of finding good quality companies with little or no exposure. Because they are small and not complicated the small cap stock is easier for the individual to analyze.

As with all investment portfolios there is a need to have a diversified collection of different types of investments. Someone who is young has many years of investing ahead of them and therefore can take a more aggressive approach to investing. The small cap stock would fit the aggressive portion of the portfolio. It will have time to grow and if there is a loss the young investor has time to recover the loss.