How to Invest in Small-Cap Stock

Small-cap mutual funds invest in numerous small-cap stocks on investors' behalf.

Small-cap mutual funds invest in numerous small-cap stocks on investors' behalf.

Small-cap stocks represent some of the smallest companies that trade in the stock market, and have a market capitalization -- a measure of a company's size -- of less than $1 billion, according to Fidelity Investments. By nature, small-cap companies haven't yet achieved the growth of their larger-cap counterparts, and as a result offer shareholders greater opportunity for profit growth. That opportunity comes with proportionally greater risk, in that small-cap companies may never attain greater profitability, and shareholders will experience a financial loss.


Familiarize yourself with an index named the Russell 2000. This isn't the only source where you'll find small-cap stocks, but It's the defacto index for trading among small-cap stocks. The index and its components -- which include 2,000 of the smallest companies that list shares in the stock market -- can be found on the Russell Investments website.

Review the sectors of the economy in which small-cap companies operate, which range form technology to health care to finance. Famed investor Warren Buffett abides by the rule of thumb to only invest in companies with businesses and financial models that he has the capacity to understand. Although Buffett invests in well-known businesses, his logic can be applied to any universe of stocks.

Set up online alerts with financial websites that direct any developments surrounding small-cap stocks to your email account. In doing so, you'll get used the extreme price movements that small-cap stocks tend to exhibit in response to economic, market or corporate change, which is what makes these stocks so risky.


Open up an account with a stock broker. You'll have to choose between an online discount broker or a full-service brokerage firm. A discount broker is a cheaper option but you won't get any investment advice or the benefit of your stock broker's research. Use a full-service stock broker if you're willing to pay more for professional investment advice.

Read the stock broker agreement before you sign on the dotted line. Feel free to ask the brokerage firm if you have questions, and bear in mind that some brokerage agreement terms are there to profit the stock broker and not you, according to a 2013 NBC News article.

Establish a way to pay for your investment. Online brokers allow you to route the funds for your investments directly from your bank to your new brokerage account. Once you've done that, you can buy the stock yourself online.

Learn if the small-cap stock you've decided to invest in pays shareholder dividends. These are quarterly cash payments that companies have the option of making when they've got enough cash.

Consider investing via a dividend company's dividend reinvestment program, which will help you to avoid the trading commissions that stock brokers charge. Traditionally, dividends are reserved for large companies with the benefit of experience and stronger cash flows, but according to a 2011 Forbes article, small cap companies increasingly use dividends as a tactic to attract investors.

Fund a direct investment plan account, called a DRIP account, similar to the way you would pay for your stocks with a broker. Route the money from your bank account to the DRIP account established on the company's website.


  • Small-cap companies that have proven profits tend to be less risky than unprofitable businesses.


  • Bonds and large stocks are more stable investments than small-cap stocks.

About the Author

Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.

Photo Credits

  • Burke/Triolo Productions/Brand X Pictures/Getty Images