When it comes to investing, everyone wants to make the most out of their money. While traditional investments in large-cap stocks can be a popular choice, investing in international small-cap growth stocks can offer a unique set of benefits. In this article, we will discuss the advantages of investing in international small-cap growth stocks for both experienced and novice investors.
What Are International Small-Cap Growth Stocks?
Before we dive into the benefits of investing in international small-cap growth stocks, let’s first define what they are. Small-cap stocks are companies with a market capitalization between $300 million and $2 billion. International small-cap stocks, as the name suggests, are small-cap companies based outside of the United States. These stocks are considered ‘growth’ because they have a higher potential for growth compared to their larger counterparts.
Now that we have defined what international small-cap growth stocks are, let’s take a closer look at why they can be a smart investment.
Diversification
One of the main benefits of investing in international small-cap growth stocks is diversification. Investing in a variety of small-cap companies, particularly ones based internationally, can offer a level of diversification that is not possible with traditional large-cap investments. This diversification can help investors reduce their overall risk and increase potential returns.
International small-cap companies generally operate in different industries and regions, providing investors with exposure to sectors and markets that may not be available in the United States. This exposure can be particularly beneficial for investors seeking to diversify their portfolio, as it can help reduce their overall risk if one industry or market experiences a downturn.
Furthermore, investing in international small-cap growth stocks can offer diversification in terms of currency. When investing in international stocks, investors are exposed to fluctuations in currency exchange rates. This can be beneficial if the U.S. dollar weakens, as investors will benefit from the higher currency value of their foreign holdings.
Potential for High Returns
As mentioned earlier, international small-cap growth stocks are considered ‘growth’ stocks because they have a higher potential for growth compared to their larger counterparts. This higher potential for growth can translate into higher potential returns for investors.
Small-cap companies are typically in the early stages of growth, often with innovative products or services. As they continue to grow and gain market share, their stock prices can experience significant appreciation. This growth potential can provide investors with the opportunity to earn higher potential returns compared to traditional large-cap investments.
Furthermore, international small-cap growth stocks can offer investors exposure to new and emerging markets. As these markets continue to develop and expand, so too can the growth potential of the small-cap companies operating within them. This can provide investors with the opportunity to earn high returns on their investments as these markets mature.
Outperformance
International small-cap growth stocks have historically outperformed their larger counterparts over the long term. According to a study by Dimensional Fund Advisors, small-cap stocks have outperformed large-cap stocks by an average of 1.8% per year since 1926. Furthermore, the study found that international small-cap stocks have outperformed international large-cap stocks by an average of 3.1% per year since 1975.
This outperformance can be attributed to the higher potential for growth that international small-cap growth stocks offer. As these companies continue to grow and develop, their stock prices can experience significant appreciation, leading to higher returns for investors.
Risks to Consider
While there are many benefits to investing in international small-cap growth stocks, it is also important to consider the risks associated with this type of investment. Small-cap companies can be more volatile than larger companies, meaning their stock prices can experience sharp fluctuations in response to market conditions.
In addition, investing in international small-cap growth stocks can be risky due to currency fluctuations. As mentioned earlier, investors are exposed to currency exchange rate risks when investing in international stocks. This risk can be amplified in emerging markets, which can experience heightened political and economic instability.
Conclusion
Investing in international small-cap growth stocks can offer a unique set of benefits for investors seeking diversification, high potential returns, and the potential for outperformance compared to traditional large-cap investments. However, it is important to carefully consider the risks associated with this type of investment before making any decisions.
Key Takeaways
- International small-cap growth stocks can offer diversification and exposure to new and emerging markets.
- These stocks have a higher potential for growth compared to their larger counterparts, providing investors with the opportunity to earn high potential returns.
- International small-cap growth stocks have historically outperformed their larger counterparts over the long term.
- Investing in international small-cap growth stocks can be risky due to currency exchange rate fluctuations and the volatility of small-cap companies.
