As major stock market indexes approach highly overbought conditions, investors may want to look into shifting their portfolio to include small-cap stocks. Although these stocks may carry higher risks, they can also potentially result in greater rewards over the long-term. Small-cap stocks are defined as stocks of companies in the bottom-third of market capitalization when compared to their peers in the same industry. For example, if the average market capitalization in the airline industry is $1 billion, a small-cap stock might be from a company with a market capitalization of less than half that amount. When major indexes are nearing overbought conditions, many investors tend to consider shifting their portfolios from large-cap stocks to small-cap stocks. This is because small-cap stocks can be much more volatile than large-cap stocks, and therefore they can provide more potential for gains when the markets rebound. One of the main benefits of investing in small-cap stocks during an overbought market environment is that they can help diversify one’s portfolio. This is because small-cap stocks tend to move in different directions than large-cap stocks when market conditions change. For example, if the S&P 500 index loses ground due to a dip in investor confidence, small-cap stocks can benefit from a different set of factors that cause the stocks to rise. Furthermore, small-cap stocks may have an edge over large-cap stocks when it comes to growth potential. While large-cap stocks have generally provided investors with more stability in comparison with small-cap stocks, large-cap stocks may struggle to equal the growth potential of small-cap stocks over time. This is because small-cap stocks often represent emerging companies with more room to grow. In addition to potential growth, small-cap stocks can be appealing to investors for their high dividend yields. These companies tend to pay out larger portions of their earnings to shareholders than their larger counterparts, making them attractive to dividend investors. Overall, when major indexes reach highly overbought conditions, investors should consider shifting their portfolios to include small-cap stocks. While these stocks may carry greater risks than large-cap stocks, they can also potentially provide greater rewards over the long-term. Small-cap stocks may offer greater growth potential, higher dividend yields, and greater diversification. As a result, they are an idea worth considering for investors with a long-term investment horizon.