Small Firm Effect

A hypothesis that investing smaller firms leads to larger returns than can be gained from investing in larger firms. It is believed that smaller firms have more room for growth and thus can appreciate more rapidly than larger firms.

Most large firms and great success stories start off as small firms. Though the thought of nabbing the next tenbagger is attractive, big firms also have the advantage of being well-established and economies of scale due to their size. Many small firms do not necessarily possess the capability of challenging an industry giant. And a small firm in an emerging industry may still do poorly without a strong advantage over its competitors.