It's not all about the biggest stocks
- Robin Powell
- Jan 27
- 3 min read
When people think about stock market investing, they tend to focus on the biggest stocks — Apple, Microsoft, Amazon and the like.
But there are thousands of publicly listed companies you’ve probably never heard of, and many of them present real opportunities.
As TIM EDWARDS from S&P Dow Jones Indices explains, concentrating only on the biggest stocks can mean missing out on future growth.
KEY TAKEAWAYS
1. Most listed companies are relatively small
The global market includes around 11,000 listed stocks, with the US home to roughly 4,000. While a few companies dominate in size, there’s a long tail of much smaller firms, some valued at just a few million dollars.
2. Smaller stocks offer greater growth potential
While large-cap firms dominate the headlines, academic research shows smaller stocks can outperform. Companies like Apple were once small and the next major success story is more likely to come from lower down the market-cap spectrum.
3. Diversification beyond large-caps makes sense
Many investors, particularly outside the US, still focus heavily on large-cap stocks. But access to mid- and small-cap exposure is now easier and more affordable than ever, thanks to low-cost ETFs.
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TRANSCRIPT
Robin Powell: If you asked people to name some publicly listed stocks, they’d probably come up with the same responses.. Apple, Microsoft, Amazon and so on.
But most of the stocks listed on the major markets you probably haven’t heard of.
Tim Edwards: So there's about 11,000 stocks worldwide that are listed. The biggest single market is the US, with around 4000 stocks.
And the distribution of sizes that is really, really broad, says a small select few that are very, very big. And then there's a very, very long tail.
There's much more companies that are half a quarter, 100th as large, all the way down to, companies that are perhaps a million or a couple of million in valuations.
They're also listed on the exchange.
RP: There’s academic evidence to show that it makes sense to have exposure to mid-cap and small-cap stocks as well as the so-called mega-stocks.
Simply put, smaller stocks have more potential for growth.
TE: You can get a lot of that by just focusing on large companies. And in fact, because there are some that are so large, they actually capture a lot of the overall market.
However, if you're interested in companies that have better growth prospects, then you might need to look beyond the largest.
So Apple's currently the largest member of the S&P 500.
And I pick it because over the last 20 years it has been an astonishing success story. Its return is over a hundred times that of the benchmark in that period. The S&P 500 went up just over three times.
Apple just over 30,000 times now. Well done. Apple. Is it possible that that could happen again in the future?
It's almost impossible. That will happen to what's already the largest company, but among one of those smaller companies that may very well be one of those success stories.
RP: Despite the case for diversifying across stocks of different sizes, most people tend to focus on large-caps particularly investors outside the United States.
TE: If you look at European fund investors, they have almost no exposures to stocks in the mid and small cap space.
Vast majorities in the S&P 500 space. Now, part of that could be because of a lack of expertise or lack of opportunity.
There's a lot more, it's a lot easier to invest in a large cap fund. But that is changing. And I think ETFs have played a big role in that.
And nowadays you have potentially quite liquid, easy, quite low cost ways to invest in mid and small caps, not just in the US but across the world.
So I expect it to change. But certainly as we look at it right now, many investors, when they invest internationally, will focus on the large cap space.
And that may not be, taking advantage of the full opportunity they have.
RP: In short, large-cap index funds are a sensible investment over the long term.
But you may do better by investing in smaller stocks as well.
