Small-cap companies have greater potential for growth. 1 They can expand more easily because they have a smaller operational and financial base. Because of their small size, they are also riskier investments. They lack the financial resources to withstand crises or poor management.

Small-cap companies perform particularly well in the early stages of an economic recovery. This is due to the fact that interest rates remain low. It provides them with easy access to funds to invest in their expansion.

They are, however, the riskiest stocks during an economic downturn.

In a downturn, smaller businesses are more likely to fail. As a result, when the business cycle enters the contraction phase, you should reduce your allocation to small-cap stocks.