4 Reasons a Small Cap Index Fund Can Hold Its Own

A small cap index fund is an index fund that invests in companies that have market capitalizations of $300 million to $2 billion. These companies are still relatively small and are not nearly as big as the companies that make up the S&P 500. Even though these companies are smaller, there are several advantages of investing with these types of funds.

1. Room to Expand

One reason that it is beneficial to invest in these stocks is because there is plenty of room for them to grow. Many of these companies are still relatively young and have not expanded into many markets. Because of this, you can put money into them and expect it to grow in value. In contrast, many large-cap companies have already expanded into most markets across the world. There is really not much more opportunity for them. While these companies can be cash cows and create dividends for their investors, they are generally not good at providing capital appreciation for the investors. If you are interested in pure growth, small-cap stocks are definitely something to consider.

2. Hungry Companies

Besides being in a position to grow, many of these companies desperately want to continue growing. They have a hungry attitude that is often not present with many of the larger companies. Many larger companies tend to feel a sense of entitlement and do not necessarily think that they have to prove themselves any longer. Most younger companies want to prove that they belong and are willing to work harder and be more efficient.

3. Lack of Information

With many of these companies, there is a general lack of information in the market place. While in some cases this can be a bad thing, it can also work to your advantage if you are an investor. All it takes is one significant news story about a small cap company to generate substantial interest in that company. If you are already a shareholder, the price of your stock could increase substantially. Throughout the year, a small cap index fund is bound to benefit from several of these occurrences.

4. Value Investing

Another benefit of this type of fund is that you can realize significant value. Value investors look to find companies that are undervalued in the market place, and then invest. When the price of the stock comes back to where it should be, the investors can realize a nice return on their investment. In the small cap stock market, there are ample opportunities for this type of find. Since there is a lack of attention from stock market analysts in this part of the market, many of the stocks are priced incorrectly in the market. When you invest in them, you might be able to realize a much bigger return than you had planned.

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