Due to their low valuations and high growth potential, small-cap stocks represent good investment opportunities in the eyes of many. In the last two decades, small-cap stocks have outperformed large-cap stocks. Furthermore, the global economic hit of the coronavirus pandemic left many of these stocks looking significantly undervalued. This makes them an area of interest for potential investors, so we have compiled a list of the 10 best small-cap stocks to buy in 2021.
Where Can I Trade Small-Cap Stocks?
Small-cap stocks are publicly traded on the US, UK, and other stock markets. Many brokers allow you to trade stocks from other countries; e.g., UK brokers should allow you to buy US stocks unless you’ve opened a more restricted share-dealing account such as a Stocks & Shares ISA. We’ve found some of the best brokers for you.
What Are Small-Cap Stocks?
Small-cap stocks are companies that have a small market capitalization relative to larger-sized firms. The term “small-cap” implies that the total value of the company's shares is between $300 million and $2 billion.
Small-cap companies are often young companies with huge revenue growth potential, and they are typically spread across the 11 sectors of the stock market.
Information about these stocks is more difficult to access than large-cap and mid-cap companies because institutional investors and analysts typically pay less attention to them. This can be advantageous to the savvy retail investors who assess a small-cap company’s shares to be priced too low due to improper valuation. This is what may have happened in the case of GameStop shares in Q1 2021 although sheer speculation (a bet on continuing share price rises) may also have played a part.
It’s not all good news, because investing in small-cap stocks comes with a higher risk. Startup companies might not have stable business models, which could impact their financial performance. Also, these stocks are less liquid than their large and mid-cap counterparts, so it can be harder to get a good price when buying or selling the shares.
How to Trade and Invest In Small-Cap Stocks
Open a Trading Account
To invest in small-cap stocks, you will need to open a trading account on your selected brokerage platform. This relatively simple process takes only a few minutes to select a username and password, and provide your contact details. You may need to provide some identification such as a valid passport or driving license.
Choose Small-Cap Stocks
You can add funds to your account via debit or credit card, and sometimes PayPal. Next, navigate to the broker’s list of stocks to trade, and click each one (if you can) to discover more detail. Remember you’re looking for stocks with small capitalisations, and some brokers might already categorise these stocks as “small-cap” to make your job easier.
Place Your Trade
Beginners should begin by “paper trading” via the broker’s demo account facility (if available). Once you know what you’re doing, you can click the “buy” button next to your chosen stock in your live account.
Top 10 Small-Cap Stocks to Trade
Here is our list of the top 10 small-cap stocks to trade in 2021:
- Axos Financial
- Winmark Corp
- Citi Trends
- EVI Industries
- Fathom Holdings
- Unisys Corp.
- Veritone Inc.
- Pacific Ethanol
1. Axos Financial (NYSE: AX)
Axos is an online financial services company that provides auto loans and mortgages, investment advice, and brokerage services. The company's competitive advantage is its exclusive online presence, which reduces operational costs and allows it to charge clients low fees. After falling in March 2020, the share price had tripled by March 2021.
2. Winmark Corp. (NASDAQ: WINA)
Winmark operates as a franchisor for value-oriented retailers. Its franchise model includes 10-year agreements with a high renewal rate, which makes the stock a prime example of a business that should benefit from the reopening of the economy. Winmark shares appreciated after the March 2020 lows but in a very volatile way.
3. Yext (NYSE: YEXT)
Yext maintains a regularly updated online directory of companies such as restaurants and hotels. Unsurprisingly, the Yext share price was volatile during the coronavirus pandemic, but analysts expect it to improve as economies reopen in the third and fourth quarter of 2021.
4. Citi Trends (Nasdaq: CTRN)
Citi Trends is an urban fashion retailer that should benefit as coronavirus lockdown restrictions are removed and pent-up demand can be satisfied. Citi Trends shares surged by more than 10x after the low point in March 2020.
5. EVI Industries (NYSE: EVI)
EVI sells, leases, and services commercial laundry equipment for large businesses and corporations that include hotels, restaurants, and government institutions. This stock could benefit from the reopening of the economy. Shares have recovered somewhat from the March 2020 low price but the share price is nowhere need the all-time high price achieved in September 2018.
Expert Tip on Investing in Small-Cap Stocks“ For beginners, it is important to know that small-cap stocks can reflect the state of the overall economy, so keep an eye on general macroeconomics as well as the individual company’s fundamental financial ratios. Also, consider that news announcements can have a significant effect on the share prices of small-cap stocks. ”- Emmanuel Ekwomadu
Why Invest in Small-Cap Stocks?
Small-cap stocks perform well when the economy is doing well, which makes them attractive investments to buy at low prices when markets are down. They could continue to do well as the economy continues to reopen after the coronavirus pandemic. Remember that small-cap stocks are more likely than large-cap stocks to be undervalued plays because they receive less attention from analysts.
Frequently Asked Questions
We have identified some small-cap stocks with upside potential, but — by their very nature — it is almost impossible to pick out a single stock as a sure investment.
Small-cap stocks could be good investments as economies continue to reopen. The potential for small-cap stocks to rise rapidly (like GameStop did in Q1 2021) makes them appealing investments.
Our research suggests that Citi Trends is among the most financially stable small-cap companies at the time of writing.
Small-cap stocks are particularly attractive to investors who are willing to crunch the numbers to see if those stocks are undervalued or set for future growth. Only investors who trade on certain broker platforms can trade small-cap stocks because some brokers (such as some leveraged spread bet and CFD providers) don’t allow small-cap stocks to be traded by retail investors.
Compared with big-cap stock market stalwart companies that have been around for many years, small-cap stocks can be risky and subject to significant (and sudden) share price movements. Therefore, it’s better for beginner investors to start with large-cap stocks.
Small-cap stocks became popular during the Covid-19 pandemic lockdowns— when many people had more time on their hands to trade, and some of them had more money to trade with because they were spending less on entertainment and travel.
No, many small-cap stocks are traded on the US equities market between 9.30 a.m. and 4 p.m. New York Time. Other small-cap stocks trade on other exchanges such as the London Stock Exchange during the local trading hours.