Demand for small-cap stocks — companies whose total share value is $3 billion or less — is surging on Wall Street, reflecting growing sentiment that it's safe to invest in America again.
After investors yanked more than $15 billion out of small-cap stocks last year, the largest amount since 2007, they're back, pumping $2.4 billion back into those equities so far in 2012, the New York Times reports, citing Lipper data.
Big companies can weather financial uncertainty due to their reach and scope, but smaller companies are more dependent on organic growth to prosper.
"It is a decent confidence barometer," says Scott Wren, a senior equity strategist for Wells Fargo Advisors, the New York Times adds.
"Investors are confident enough to buy some of these small companies, betting that the U.S. economy is going to continue to grow."
Still, risks remain.
A lot of demand for small-cap stocks stems from exchange-traded funds, which can pull the money out just as quickly as they brought it in.
Furthermore, many smaller companies tend to be takeover targets for larger companies, and investors may be buying their shares in anticipation of M&A activity over improving economic fundamentals.
Still, despite their lack of liquidity, often fragile balance sheets and volatility, small-cap stocks are set to reward those who invest, other experts add.
"Although small companies had weak performance in 2011, we believe it is a good time for investors to re-assess exposure to an area of equity markets that delivers superior long-term return potential," UBS Global Asset Management analysts write in a report, according to MarketWatch.
"Valuation levels look reasonable against history and it would appear to us that the timing for investment could be fortuitous."
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