Associated Risks with Small-cap Stocks
Investing in small-cap equities can offer potential returns, but carries a greater degree of risk than investing in larger, more established companies. Before thinking about an investment in small-cap stocks, it is essential to be aware of the following risks:
1. Volatility: Small-cap equities are typically more volatile than their larger counterparts. Their smaller market capitalisations and trading volumes make them subject to greater price fluctuations caused by market sentiment, news, and other factors.
2. Liquidity Risk: Small-cap equities may have smaller trading volumes, resulting in less liquidity. This may make it more difficult to buy or sell shares fast without significantly affecting the stock’s price.
3. Business Risk: Smaller businesses are frequently less diverse in terms of products, services, and markets, making them more vulnerable to industry disruptions or changes in the economic situation.
4. Limited Resources: Small-cap companies may lack the resources required to withstand setbacks or capitalise on opportunities for expansion. This can have an impact on their ability to innovate, grow, and compete effectively.
5. Market Timing Risk: Investing in small-cap companies requires a long-term mindset, as short-term volatility can be significant. If an investor is compelled to sell during a period of decline, poor market timing could result in losses.
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