Small Cap Stocks vs. Alternative Investments: Which Offers Higher Growth Potential?

Investors constantly seek opportunities with high growth potential, balancing risk and reward. Small cap stocks and alternative investments represent two contrasting approaches to wealth-building, each with unique characteristics and benefits.

Small cap stocks refer to companies with a market capitalization between $300 million and $2 billion. These companies are typically in the early growth stages, offering investors the potential for significant capital appreciation as they scale operations and capture market share.

Recent High-Performing Small Cap Stocks

1. Enphase Energy (ENPH):
   • Enphase Energy, specializing in solar microinverters, transitioned from a small cap to a large cap within five years, with its market capitalization skyrocketing from under $1 billion in 2017 to over $20 billion by 2022.
   • Growth was driven by the renewable energy boom and strategic international expansion.
2. Crocs Inc. (CROX):
   • Known for its distinctive footwear, Crocs experienced a massive resurgence, with its market cap growing from $500 million in 2018 to over $8 billion by 2023.
   • Key drivers included successful marketing campaigns and product diversification.
3. Upstart Holdings (UPST):
   • Upstart, an AI-driven lending platform, emerged as a small cap in 2019 and briefly reached mid-cap status, fueled by investor enthusiasm for fintech innovations.
   • Although its valuation experienced volatility, its rapid growth highlighted the potential of small caps in disruptive industries.

Pros and Cons of Investing in Small Cap Stocks

Advantages

1. High Growth Potential:
   • Small cap companies often operate in emerging markets or disruptive sectors, providing opportunities for exponential growth.
2. Undervalued Opportunities:
   • Due to limited analyst coverage, small caps may trade below their intrinsic value, allowing savvy investors to capitalize on mispriced assets.
3. Diversification:
   • Adding small caps to a portfolio introduces exposure to high-growth sectors not dominated by large-cap giants.

Disadvantages

1. Volatility:
   • Small caps are more susceptible to market fluctuations, often exhibiting higher price swings than their large-cap counterparts.
2. Liquidity Risks:
   • Lower trading volumes can make it challenging to buy or sell shares without impacting the stock price.
3. Higher Failure Rates:
   • Due to limited resources and competitive pressures, small cap companies have a higher likelihood of failure compared to established firms.

Why Diversify with Alternative Investments?

While small cap stocks offer high-growth potential, they carry significant risks. Diversifying into alternative investments can stabilize a portfolio and provide unique income opportunities. Below are four popular alternative investment avenues:

1. Investing in Cryptocurrency with Coinbase

Overview:
Cryptocurrency represents a high-risk, high-reward asset class. Platforms like Coinbase make it easy for investors to trade and hold digital currencies like Bitcoin, Ethereum, and Solana.

Advantages:

• Liquidity: Cryptocurrency markets operate 24/7, allowing investors to buy and sell anytime.
• Growth Potential: Assets like Bitcoin have demonstrated substantial appreciation over time.
• Decentralization: Cryptocurrencies operate independently of traditional financial systems, offering a hedge against inflation and currency devaluation.

Risks:

• Volatility: Prices can fluctuate dramatically within short periods.
• Regulatory Uncertainty: Changing government policies can impact market performance.

Example:
Investors who purchased Bitcoin at $3,000 in 2018 saw its value surge to just over $100,000 by December, 2024—a 3,333% increase.

2. Investing in Music Catalogs with Royalty Exchange

Overview:

Platforms like Royalty Exchange have democratized access to music royalties, enabling investors the ability to start earning money from their favorite songs with some catalogs selling for as little as a few thousand dollars. This enables individuals to earn passive income from popular songs without substantial capital. Thousands of investors have already discovered the power of music royalties, earning passive income from songs by artists like Kendrick Lamar, Ariana Grande, Jimi Hendrix, The Grateful Dead, & more.

On Royalty Exchange you can sign up as an investor and search through thousands of music catalog listings that include producer and songwriter royalties to some of the biggest songs of the past few decades. Discover why song royalties are one of the best investments to grow your wealth in 2024 and download the free Ultimate Guide To Music Royalties to learn everything you need to know about investing in royalties.

Advantages:

• Stable Income: Music royalties provide consistent payments over the life of the copyright.
• Diversification: Adds a non-correlated asset to traditional investment portfolios.
• Access to Iconic Songs: Investors can own shares of royalties from popular tracks and even earn money from their favorite songs.

Risks:

• Earnings Variability: Income depends on the continued popularity of the music.
• Liquidity Challenges: Reselling royalty rights can be difficult, although the secondary market on their platform makes it easy.

Example:

Take this catalog featuring songs by Beyoncé for instance. The investor acquired this catalog for $113,400 and collected $40,959 in royalties over 25 months, achieving an impressive ROI of 50.70% after they sold it to another buyer on the platform for $138,782. Song royalty acquisitions can be extremely lucrative investments as you can see from this example. Song royalties by legendary artists like Beyonce are a collector's item as well. Just as people collect sports cards, artifacts, and other items, owning a piece of music history is priceless. Especially when you consider the countless iconic hits that she has in her discography, people will continue to listen to her music for generations.

3. Investing in Real Estate with Fundrise

Overview:
Fundrise is a crowdfunding platform that enables individuals to invest in diversified real estate portfolios with minimal capital requirements.

Advantages:

• Passive Income: Investors earn dividends from rental income and property appreciation.
• Accessibility: Starting at just $10, Fundrise democratizes access to real estate investments.
• Portfolio Diversification: Includes commercial and residential properties across different markets.

Risks:

• Illiquidity: Real estate is a long-term investment, and early withdrawals may incur penalties.
• Market Fluctuations: Economic downturns can reduce property values and rental income.

Case Study:
An investor allocated $1,000 to Fundrise’s Growth eREIT in 2017 and achieved annualized returns of over 8%, outperforming traditional savings accounts.

4. Investing in Artwork with Masterworks

Overview:
Masterworks allows investors to purchase fractional shares in high-value artworks, making the fine art market accessible to everyday investors.

Advantages:

• Long-Term Appreciation: Blue-chip artworks have historically appreciated at a steady rate.
• Diversification: Art investments are uncorrelated with stock markets.
• Prestige: Ownership of iconic works adds a cultural element to portfolios.

Risks:

• Illiquidity: Investments may require holding periods of 3-10 years before resale.
• Market Sensitivity: Trends and collector interest can impact valuations.

Case Study:
An investor purchased fractional shares in a Basquiat painting through Masterworks and saw a 13% annualized return after the artwork was sold.

Conclusion: Balancing Risk and Reward

Small cap stocks offer unparalleled growth potential, making them an attractive option for risk-tolerant investors. However, their volatility and failure rates highlight the importance of diversification. Alternative investments, such as cryptocurrency, real estate, music royalties, and fine art, provide stability, passive income, and unique opportunities for portfolio growth.

By combining small cap stocks with alternative investments, investors can achieve a balanced portfolio that captures high returns while mitigating risks. Whether you’re drawn to the innovation of small caps or the consistent income of royalties, the key lies in strategic diversification.