What Are Small-Cap Value Stocks?
Small-cap value stocks are companies with a small market capitalization that are considered undervalued by market analysts. These companies usually have lower price-to-earnings ratios, higher dividends, and are trading below their intrinsic value.
Investing in small-cap value stocks can be incredibly rewarding, but it also comes with higher risks due to the volatility of these stocks. However, there are many benefits to investing in international small-cap value stocks.
Let’s take a closer look at some of the benefits.
Higher Returns
One of the primary benefits of investing in international small-cap value stocks is the potential for higher returns. Small-cap value stocks have historically outperformed large-cap stocks, and international small-cap value stocks have the potential to do even better than their domestic counterparts.
Research has shown that international small-cap value stocks have provided investors with higher returns than domestic small-cap value stocks since the 1970s. This is due to a lack of research coverage and less competition for these investments, leading to inefficiencies in the market.
Diversification
Investing in international small-cap value stocks can also diversify your investment portfolio. By investing in various international markets, you can reduce your risk of loss if one market experiences a downturn.
Additionally, investing in small-cap value stocks diversifies your portfolio by sector. Small-cap value stocks can be found in various industries, including healthcare, technology, and energy. By investing across sectors and markets, you can reduce the risk of being overly invested in one particular sector or market.
Identifying Gems in the Rough
The international small-cap value market provides investors with the opportunity to identify gems in the rough. By investing in these undervalued companies, investors can potentially find stocks that will outperform the market over the long run.
As these companies grow, their market capitalization also grows, leading to significant returns for investors. However, it’s important to do your due diligence and research these companies thoroughly before investing in them.
Why Invest in International Small-Cap Value Stocks?
International small-cap value stocks are an excellent investment opportunity for many reasons. These stocks provide investors with the potential for higher returns, diversification, and the opportunity to identify gems in the rough.
Here are some more reasons why you should consider investing in international small-cap value stocks:
Efficient Market Inefficiencies
The international small-cap value market is not as heavily researched as the domestic small-cap value market. This creates inefficiencies in the market that can be exploited by astute investors who do their research.
International small-cap value stocks are often overlooked by larger institutional investors due to their small market capitalization. As a result, individual investors have a better chance of identifying undervalued companies and profiting from their growth.
Increased Exposure to Emerging Markets
Investing in international small-cap value stocks provides investors with increased exposure to emerging markets. These markets are often more volatile than developed markets but have higher growth potential. By investing in small-cap value stocks in emerging markets, investors can benefit from the growth potential while still investing in undervalued companies.
Higher Dividend Yields
Small-cap value stocks are often associated with higher dividend yields. This is because undervalued companies often return value to shareholders through dividends rather than reinvesting profits back into the company. By investing in international small-cap value stocks with higher dividend yields, investors can benefit from regular income while still investing for growth.
Risks of Investing in International Small-Cap Value Stocks
While investing in international small-cap value stocks comes with many benefits, it also comes with higher risks. These stocks are often more volatile than large-cap stocks and are more susceptible to market downturns.
Here are some of the risks associated with investing in international small-cap value stocks:
Market Volatility
International small-cap value stocks are often more volatile than large-cap stocks due to their smaller market capitalization. These stocks are also more susceptible to market downturns, which can cause significant losses for investors.
Currency Risk
Investing in international small-cap value stocks can expose investors to currency risk. Fluctuations in exchange rates can cause significant losses for investors, especially if they invest in countries with unstable currencies.
Less Liquidity
Investing in international small-cap value stocks can also come with less liquidity than investing in large-cap stocks. This means that it may be more difficult to buy or sell these stocks, which can lead to higher trading costs or an inability to exit a position when desired.
Conclusion: Invest in International Small-Cap Value Stocks for Greater Returns
International small-cap value stocks provide investors with a unique investment opportunity that can lead to higher returns, increased diversification, and exposure to emerging markets. While there are risks associated with investing in these stocks, the potential for higher returns makes them a worthwhile investment for long-term investors.
Key Takeaway:
Investing in international small-cap value stocks can provide investors with higher returns, diversification, and exposure to emerging markets. These stocks are often undervalued and provide astute investors with an opportunity to identify gems in the rough. While investing in these stocks comes with higher risks, the potential for higher returns makes them a worthwhile investment for long-term investors.
