Top Small Cap Stocks to Buy Now in 2025

Looking for high-growth potential in the stock market in 2024?

Maybe knowing what a small cap stock is can reveal powerful investment opportunities.

Small-cap stocks, while come with higher risks, can offer substantial rewards for investors.

This guide explores their pros and cons and then dives into five exciting small stocks to buy now across various sectors: CarParts.com, Stride, Inc., The Bancorp, Inc., First Financial Bancorp, and NMI Holdings Inc.

Let’s see why these companies might be among the top small-cap stocks to consider!

What Is a Small Cap Stock?

A small-cap stock refers to shares of public companies with relatively small market capitalization.

Market capitalization, or market cap, is the total value of a company’s outstanding shares, calculated by multiplying the current share price by the total number of outstanding shares.

To make this easier, these are some terms to understand:

• Small: Indicates the company’s size in terms of market value.
• Cap: Short for “capitalization,” referring to the total market value.
• Stock: Represents ownership units in a public company.

There is no universally agreed-upon range for small-cap market capitalization, but it generally falls between $250 million and $2 billion.

What are some of the characteristics of small-cap stocks?

Small-cap stocks, such as the top small-cap stocks, offer unique characteristics that differentiate them from larger companies:

#1 – High Growth Potential:

Small-cap companies are often young and in their growth phase, translating to significant stock price increases as they expand their market share and profitability. This makes them attractive for investors looking for small stocks to buy now.

#2 – Higher Volatility:

Due to their smaller and less established nature, small-cap stocks tend to be more volatile than large-cap stocks. Their prices can fluctuate dramatically in response to company news, industry trends, or overall market conditions.

#3 – Lower Liquidity:

Small-cap stocks are generally traded less frequently than large-cap stocks, making it harder to buy or sell them quickly at desired prices.

#4 – Greater Risk:

Investing in small-cap stocks carries a higher degree of risk compared to large-cap stocks. These companies are more susceptible to economic downturns and have a higher chance of failure.

#5 – Diverse Opportunities:

The small-cap market encompasses a wide range of industries and sectors, allowing investors to find companies with specific growth prospects that align with their investment goals.

Benefits and Risks of Small Cap Stocks

Small-cap stocks can be exciting for investors looking for high growth potential. However, this potential comes with higher risk than investing in large-cap stocks.

So… let’s find out!

Benefits:

#1 High Growth Potential:

Small companies are often young and hungry, often times because there is a large opportunity for an exponential growth in their company.

Thus, this comes with the greater chances of rapidly expand their market share and profitability.

High growth = significant stock price increases or fluctuations in share price for investors make a profit between the changes.

#2 Greater Diversification:

The small-cap market offers a vast array of companies across different industries and sectors.

If you do your diligent research, you will find out there are many unexpected unique investment opportunities that align with your investing goals… which can potentially improve the overall diversification of your portfolio.

Risks:

#1 Higher Volatility:

Small-cap stocks tend to be more volatile than large-cap stocks.

Their prices can swing dramatically in response to company news, industry trends, or even general market conditions.

It can be nerve-wracking for some investors if you do not have strong control over your emotions.

#2 Lower Liquidity:

Similar to selling a rare, one-of-a-kind coin, small-cap stocks can have fewer interested buyers.

This can make it difficult to sell your shares quickly at your desired price or may forces you to sell at a loss when the stock is in red.

#3 Greater Risk of Failure:

Small companies are inherently riskier than established giants.

They have less experience, may be more reliant on a single product or market, and are more susceptible to economic downturns.

Criteria for Selecting Top Small Cap Stocks

So, you are interested in the potential of small-cap stocks, but how do you pick the winners?

Do not worry!

I will share with you some main factors to look out for when you are researching top small-cap stocks and small stocks to buy now.

#1 Growth Potential:

This is all about finding companies with a clear path to future growth.

What to do: Look for companies with:

• A strong product or service
• A sustainable business model
• A talented management team
• A large addressable market (potential customer base)

#2 Financial Health and Stability:

Even high-growth companies need a solid financial foundation.

What to do:

Analyze the company’s financials, including:

• Revenue growth
• Profitability
• Debt levels vs. assets own
• Cash flow

Choose companies with a healthy balance sheet and strong cash flow to ensure sufficient liquidity.

#3 Industry Trends and Sector Performance:

Not all industries are created equal.

What to do:

Research the overall health of the industry the company operates in.

Look for companies positioned to benefit from favorable industry trends.

Questions to ask yourself:

• Are there positive tailwinds driving growth in the industry?
• Is the industry facing headwinds?
• Any macroeconomics challenges such as geopolitical issues, trade wars, logistical problems and etc.?

Top Small Cap Stocks to Buy Now

1. Innodata Inc. (INOD)

Market Value: Approximately $1.2 billion
Sector: Technology
2024 Performance: 436% increase
Overview: Innodata is a global data engineering company that has significantly benefited from the AI boom. Its Synodex segment, offering medical record transformation, has been particularly promising. The company’s revenue more than doubled in Q3 2024 compared to the prior year, indicating strong growth momentum.

2. Natural Grocers by Vitamin Cottage Inc. (NGVC)

Market Value: Approximately $990 million
Sector: Consumer Staples
2024 Performance: 168.3% increase
Overview: Operating both Natural Grocers markets and the Vitamin Cottage brand, this company has thrived due to a growing consumer focus on healthier eating habits. Its strong performance reflects the increasing demand for organic and natural products.

3. Redwire Corporation (RDW)

Market Value: Approximately $1.14 billion
Sector: Aerospace & Defense
2024 Performance: 500.7% increase
Overview: Redwire is a space infrastructure company that has seen substantial growth, recently achieving its longest winning streak in five months. The company has secured significant contracts, including a $45.5 million deal with the Air Force Research Laboratory, positioning it well in the expanding space industry.

4. Tarsus Pharmaceuticals (TARS)

Market Value: Approximately $1.5 billion
Sector: Biotechnology
2024 Performance: 150% increase since August
Overview: Tarsus has experienced strong growth driven by its drug Xdemvy, which treats Demodex blepharitis. Sales surged from $1.9 million to $48.1 million within a year. The company is also developing treatments for rosacea and Lyme disease, indicating a robust pipeline.

5. EQT Corporation (EQT)

Market Value: Approximately $2 billion
Sector: Energy
2024 Performance: Significant growth anticipated
Overview: EQT is a leading natural gas producer expected to benefit from increased electricity demand due to new data centers and AI advancements. Analysts forecast considerable growth for natural gas producers like EQT in 2025.

6. Alliance Entertainment Holding Corporation (AENT)

Market Value: Approximately $500 million
Sector: Consumer Discretionary
Overview: Alliance Entertainment is a distributor and wholesaler of entertainment products. The company stands out for its promising products and agreements in the works, indicating potential growth in the broader small-cap landscape.

7. Hallador Energy Company (HNRG)

Market Value: Approximately $300 million
Sector: Energy
Overview: Hallador Energy focuses on coal production and has streamlined operations to enhance efficiency. The company’s strategic initiatives position it for potential growth, especially with a strong U.S. economy heading into 2025.

8. Lithium Americas Corp. (LAC)

Market Value: Approximately $2.5 billion
Sector: Materials
Overview: Lithium Americas is poised to capitalize on the growing demand for lithium, essential for electric vehicle batteries. Despite market fluctuations, the company’s strategic positioning indicates strong growth potential in 2025.

9. SelectQuote Inc. (SLQT)

Market Value: Approximately $1 billion
Sector: Financial Services
Overview: SelectQuote is a direct-to-consumer insurance platform. The company is leveraging AI to improve efficiency and consumer outcomes, positioning it well for growth in 2025.

10. Cohu, Inc. (COHU)

Market Value: Approximately $1.5 billion
Sector: Technology
Overview: Cohu provides equipment and services for semiconductor testing. With the increasing demand for AI-capable chips, Cohu is expected to see significant earnings growth as key markets recover.

Read also: Different Types of Stocks Explained

Investment Strategies for Small-Cap Stocks

Here are some key strategies to consider when investing in small-cap stocks, often touted as top small-cap stocks and small stocks to buy now:

Diversification and Risk Management

1. Diversification:

Do not put all your eggs in one basket. Spread your investments across small-cap stocks from different industries and sectors. This helps mitigate risk if one particular company or industry performs poorly.

2. Balance with Larger Companies:

Small-cap stocks should be a portion, not the entirety, of your portfolio. This helps balance the higher risk with the potential for higher returns.

3. Use Stop-Loss Orders:

Consider stop-loss orders to automatically sell a stock if it falls below a certain price, limiting potential losses.

4. Maintain a Cash Reserve:

Having cash readily available allows you to take advantage of buying opportunities that may arise or provide a buffer during market downturns.

Long-Term vs. Short-Term Investment Strategies

A. Long-Term Strategies:

• Suited for Long-Term Investors: Small-cap stocks are generally better suited for long-term investors. Their prices can be volatile, so a longer investment horizon allows you to ride out market fluctuations and benefit from the company’s long-term growth.
• Potential for Growth: Investing in top small-cap stocks for the long term can lead to significant returns as these companies grow.

B. Short-Term Strategies:

• Higher Risk: Short-term trading of small-cap stocks can be riskier due to increased volatility, which can lead to significant losses if you’re not careful.
• Active Management Required: Short-term strategies require more active management and a higher tolerance for risk.

Importance of Due Diligence and Research Before Investing

Basic Due Diligence on Company Background:

#1 Analyze Company Financials:

• Examine financial statements – income statements, balance sheets, and cash flow statements.
• Look for trends in revenue, profitability, debt levels, and cash flow.

#2 Research Management Team:

Evaluate the experience and track record of the company’s management team. Are they qualified and have a good reputation?

#3 Understand Industry Trends:

Assess the overall health and future outlook of the industry the company operates in. Are there tailwinds driving growth, or is the industry facing headwinds?

#4 Review Analyst Reports:

Read research reports from reputable financial analysts to gain insights into the company’s prospects.

#5 Stay Informed with News:

Keep up with the latest developments through news articles and press releases.

Resources for Research:

1. Company Websites: Most public companies have an investor relations section on their website with financial reports, press releases, and other relevant information.
2. Financial Websites: Websites like Yahoo Finance and Google Finance provide financial data, news, and analyst ratings for publicly traded companies.
3. SEC Filings: The SEC website allows access to a company’s official filings, including annual reports and quarterly reports, which contain detailed financial information.
4. Investment Research Firms: Some investment research firms offer free or paid research reports on small-cap companies.

Conclusion

Small-cap stocks can be a valuable addition to a diversified portfolio, offering significant growth potential. However, they also come with increased risk and volatility. By employing sound investment strategies, conducting thorough research, and managing risk effectively, you can potentially maximize your returns while minimizing losses in the exciting world of small-cap stocks. Consider these strategies and insights when identifying small stocks to buy now.

**Disclaimer : This is not a financial advice. This information is for educational purposes only and should not be considered investment advice. Please consult with a financial advisor before making any investment decisions.