though small-cap companies are generally viewed as riskier investments than large-cap stocks, a sufficient number of small-cap companies have good future prospects and high expected returns on equity to warrant inclusion in all but the greatest risk aversions All portfolios.

Risks associated with small-cap stocks

Small-cap stocks have four key characteristics that make them riskier than large-cap stocks.

Trading small-cap stocks is more difficult for a number of reasons, one of which is the low liquidity of these companies. In this case, investors may find it difficult to acquire enough shares at a reasonable price and to sell them quickly at a favorable price.

Small-cap companies typically have more limited access to capital and less capital than large-cap companies. Because of this, it can be difficult for small companies to obtain the financing they need to fill liquidity gaps, fund new market expansion activities or make major investments. When the economy is in a downturn, the problem can get tougher for companies with smaller market caps.

A third potential additional risk associated with investing in small-cap companies is a lack of operating history and a potentially flawed unproven business plan. Both of these aspects can make it difficult for small companies to fully compete with larger companies. Small businesses are more vulnerable to changes in customer preferences because they are less likely to have an established loyal customer base.

A fourth type of risk associated with small-cap companies involves data. Because less information on small companies is generally available to the public, it is more difficult for potential investors to make an informed assessment of small-cap stocks.

Advantages of small-cap companies

There are several benefits to investing money in small-cap companies, even though these stocks carry a higher level of inherent risk. One of the benefits is that smaller companies are more likely to achieve correspondingly larger growth rates. $500,000 multiplies much faster than $10 million. While small-cap growth may seem easy, large-cap growth is much more difficult.

Because smaller companies typically have closer leadership teams, they are also better able to adapt quickly to changing market conditions. This is similar to how a rowboat can change direction more easily than a giant ocean liner. In this regard, small companies have an advantage over large companies.

Additionally, small-cap companies have the opportunity to discover hidden value. Most research on Wall Street focuses on a very small number of public companies, most of which are large-cap stocks. This is standard practice in the investment community. Small-cap companies are less likely to get media coverage, thus presenting more opportunities for investors looking for cheap stocks.

（Writer：小编）