Investors salivate over the biggest companies in the market — the likes of Apple, Google and Amazon — but where’s the love for the market’s perpetual underdogs: small-cap stocks?
When these investments do get some time in the limelight, it’s often for unflattering reasons — violent price swings or fraudulent activity, for example. Small caps can diversify portfolios and bring higher growth potential — albeit with higher risks.
What are small-cap stocks?
Small-cap stocks are company shares with market values between $250 million and $2 billion, though that range isn’t universal. “Cap” is shorthand for market capitalization, or the total number of a company’s shares multiplied by its current stock price.
The definition of small when it comes to stocks is subjective. The Russell 2000 Index, the first benchmark of small-cap stocks, is the best-known gauge. The market caps of its member companies currently range from about $240 million to $6 billion. The other major indexes tracking these stocks — the Standard & Poor’s SmallCap 600 and the MSCI USA Small Cap Index — include U.S. companies with even broader ranges of market caps.
Small-cap stocks vs. mid-cap and large-cap stocks
Again, definitions can vary, but here is the breakdown of small-cap stocks versus mid-cap and large-cap stocks, according to the Financial Industry Regulatory Authority (FINRA):
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Small-cap stocks: Public companies valued at $250 million to $2 billion.
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Mid-cap stocks: Companies whose market capitalization is more than $2 billion but less than $10 billion.
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Large-cap stocks: Companies worth $10 billion or more.
Best small-cap stocks, ordered by one-year performance
Below is a table of the 21 best-performing stocks that are listed on major U.S. exchanges and have a market cap under $10 billion, ordered by one-year returns.
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The best-performing small cap stock by one-year return is AXT Inc (AXTI), which is up 7009.71%. |
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Babcock & Wilcox Enterprises Inc |
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Terns Pharmaceuticals Inc |
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Hycroft Mining Holding Corp |
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Aureus Greenway Holdings Inc |
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Source: Finviz. Data is current as of May 4, 2026, and is intended for informational purposes only. |
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Small caps historically have a relatively high correlation — meaning they tend to move in lockstep — with large-cap stocks. But which group is performing better than the other over a given time frame fluctuates regularly, based on factors such as macroeconomic growth and politics.
Why small-cap stocks are risky
As small-cap businesses expand, their stocks offer a higher growth potential compared with larger companies. But that comes with a greater risk of volatility — including more (and bigger) fluctuations in stock prices and earnings reports. This trade-off is known as the risk premium.
Small-cap stocks can also be more fertile territory for fraudulent activity.
Why small-cap stocks are appealing
The sheer number of small-cap stocks means there’s a plethora of options for investing in them. What’s more, the proliferation of exchange-traded funds has made it easier to buy a basket of stocks with a specific investing strategy — growth or value, for example. Small caps can be an under-appreciated — or even overlooked — way to add diversification to your portfolio.
Why small-cap stocks are not that different
It’s important to know what makes small-cap stocks distinctive, but you shouldn’t necessarily obsess over the differences. They have a lot in common with the others that might be in your portfolio: They trade on exchanges, their prices are published intraday, Wall Street analysts write research reports about them, and by virtue of being public, these companies must disclose a wealth of information to investors.