Top Three Notable Micro-Cap Shares to Invest in 2024
Some outstanding investments from the previous 25 years originated as small-cap stocks. Amazon (AMZN -0.39%) was valued at just $7 in 1998, while Tesla (TSLA -1.47%) had a market valuation barely surpassing $1 billion in 2010.
Investing in small companies can be financially rewarding, but it comes with inherent risks that investors should comprehend. This section provides an in-depth look at small-cap stocks, along with our recommendations for some high-performing options.
What are small-caps?
What constitutes small-cap stocks?
The term 'small-cap' refers to 'small market capitalization,' which signifies a company's share price multiplied by the number of outstanding shares. A company is categorized as a small-cap when its market cap falls between approximately $300 million and $2 billion.
Companies are usually classified based on market capitalization as follows:
| Category | Market Capitalization || --- | --- || Micro-cap companies | Less than $300 million || Small-cap companies | $300 million to $2 billion || Mid-cap companies | $2 billion to $10 billion || Large-cap companies | $10 billion to $200 billion || Mega-cap companies | More than $200 billion |
Small-cap companies are often growth-oriented startups. They typically boast significant growth potential but are generally less stable compared to their established counterparts. Frequently, they operate at a loss.
A review of the Russell 2000, a small-cap-focused index, and the large-cap-focused S&P 500, demonstrates the dominance of small-cap stocks since 2000. The chart below illustrates this disparity:
The performance of the Russell 2000 vs. the S&P 500 between 2000 and present. Over time, small-cap stock prices tend to exhibit higher volatility than those of larger companies, and stock values fluctuate more significantly.
Small-cap stocks generally outperform in bull markets, but recent trends have been an exception. The success of large-cap tech stocks such as the S&P 500 has eclipsed the performances of small-cap stocks, partly due to high interest rates. However, with interest rates decreasing, small cap stocks have started showing signs of recovery. They are often seen as more sensitive to interest rates, implying they might perform better in a declining interest-rate environment.
The Federal Reserve seems to be moving towards a soft landing as it lowers interest rates, striving to decrease rates without triggering a recession. If it succeeds, small caps may regain their edge over large caps such as the S&P 500.
Top small-cap stocks
Micro-cap companies
Most promising small-cap stocks for investment
Many small-cap companies remain unrecognized by the masses – at least, for now. The following are some small-cap stocks to consider:
Less than $300 million
1. Magnite
Magnite is a digital advertising platform specialized in supply-side advertising, created through numerous mergers and acquisitions. The firm specializes in video and connected TV (CTV) advertising, catering to online publishers and popular streaming platforms such as Walt Disney (DIS 0.13%), Fox (FOX -0.37%), and Warner Bros. Discovery (WBD 1.24%).
Magnite partners with The Trade Desk (TTD -1.83%) and other ad tech firms to manage its inventory efficiently and ensure its technology stays up-to-date. Although its growth slowed down due to a weak streaming sector, Magnite retains significant growth prospects and remains the leader in CTV supply-side ad tech.
2. Redfin
Small-cap companies
Online real estate brokerage Redfin has been facing challenges due to the housing market slowdown, but the company seems poised to capitalize on any recovery. As a disruption in the traditional real estate market, Redfin offers lower fees for its customers compared to traditional real estate agents. This could prove advantageous following the National Association of Realtors settlement, positioning Redfin's platform as an attractive option for agents.
The business scaled back after the COVID-19 pandemic through various rounds of layoffs. Redfin will require support from the overall economic situation to recover, but the housing market will eventually stabilize, particularly as interest rates decrease. Redfin's expanded offerings, like mortgages, will drive growth in a healthier economic environment.
$300 million to $2 billion
3. Consolidated Water
Utilities serve various sizes and shapes, so it's not surprising to find a water utility on this list.
Consolidated Water (NYSE:CWCO) specializes in desalination, an emerging trend as water supplies worldwide become strained, and more coastal and tropical communities embrace desalination.
Presently, the company focuses on the Caribbean market, with several plants in the Cayman Islands and the Bahamas. This strategy has supported the company's recent growth and helped it surpass its water utility competitors. This trend should continue as Consolidated Water builds on the desalination opportunity.
Mid-cap companies
- iShares Russell 2000 ETF (IWM 0.2%): This exchange-traded fund (ETF) follows the performance of the Russell 2000, which is known as the leading index for small-cap stocks. The fund's administrators charge an annual management fee of 0.19%, equating to $1.90 per $1,000 invested.
- Fidelity Small Cap Growth Fund (FCPGX -1.66%): This mutual fund invests in small-cap stocks that have high growth potential. The fund is actively managed, aiming to outperform the Russell 2000, which means its annual management fees of 0.94% are relatively high compared to many ETFs.
Looking Ahead
$2 billion to $10 billion
Future of Small-cap Stocks in 2024
In the boom market that started in early 2023, small-cap stocks generally lagged behind, with the majority of gains going to prominent seven stocks such as *Nvidia* (NVDA -1.85%).
However, investors anticipate that this bull market will eventually spread out, allowing small caps to catch up to large caps. We saw an indication of this in July, before broader economic uncertainties pushed stock prices down again. Small-cap stocks are expected to benefit from falling interest rates, which are starting to decrease. Small-cap stocks are more sensitive to interest rates, so they should benefit from a reduced interest-rate environment. After the decline, the Russell 2000 still trades at a significantly lower price-to-earnings ratio compared to the S&P 500, though that may change soon.
Additional Investing Topics
Large-cap companies
Investing in Mid-Cap Stocks
These reasonably-sized, not-too-large companies could be suitable for your investment portfolio.****##### Investing in Growth Stocks
$10 billion to $200 billion
Secure profits by identifying growth stocks, companies poised to grow at a faster rate than the market or its industry average.****##### What Are Blue Chip Stocks? Should You Invest in Them?
These well-known, successful stocks are often recognizable household names.****##### Various Types of Stocks to Invest In: What Are They?
Stocks come in many different styles and forms. We explain them here.
Consider Investing
Mega-cap companies
Investing in Small-cap Stocks
If you're ready to maintain an investment for several years and feel comfortable with the stock price fluctuating considerably, then small-cap stocks might fit well in your investment portfolio. Investing in small-cap stocks can increase your portfolio's overall growth rate - as long as you adopt a buy-and-hold investment strategy.
More than $200 billion
Keep in mind that small businesses are more likely to fail than larger, established companies, as was proven during the COVID-19 pandemic. Thorough research before investing in any small-cap stock is essential. You can reduce your risk further by investing in a small-cap-centric fund.
John Mackey, the former CEO of Whole Foods Market, an Amazon subsidiary, is a member of Our Website’s board of directors. Jeremy Bowman has positions in Amazon, Magnite, Redfin, The Trade Desk, and Walt Disney. Our Website has positions in and recommends Amazon, Nvidia, Tesla, The Trade Desk, Walt Disney, and Warner Bros. Discovery. Our Website recommends Magnite and Redfin and recommends the following options: short February 2025 $10 calls on Redfin. Our Website has a disclosure policy.
Investing in small-cap stocks, like Magnite and Redfin, can yield significant returns but comes with higher volatility and risks compared to larger companies. It's crucial to conduct thorough research before investing in any small-cap stock to mitigate potential losses.
Small-cap companies, such as Magnite and Redfin, offer growth potential but may operate at a loss, especially during their startup phases. These companies tend to outperform in bull markets, but their performance can be affected by economic factors, interest rates, and market trends.
