Small Firm Effect

The Small Firm Effect refers to the observed tendency for smaller companies' stocks to outperform larger, more established companies over the long term. Investors may find that investing in smaller firms can yield higher returns, possibly because these companies often have more growth potential and less market coverage, leading to mispricing. However, small firms can also carry higher risks and volatility. Despite these risks, the Small Firm Effect is a recognized phenomenon in finance, highlighting the potential benefits of including smaller companies in a diversified investment portfolio to enhance overall returns.