Risks Of Investing In Small Cap Stocks

Risks Of Investing In Small Cap Stocks

Oct 20, 2014

Article written by Jack Minas of Financial Resources 101

Perhaps the best way to find out whether the stock you are planning to buy is from a small cap company is to check as to whether or not the market capitalization value is $ 1 billion or less. One easy way to do this is to multiply the number of outstanding shares with the current price per share.

Yet most experienced investors will tell you that there is a greater degree of risk involved when it comes to investing in these types of shares. So here is a list of risk involved with investing in small cap stocks:

Risk #1: Larger competitors always have the upper hand on smaller companies.

Risk #2: When market conditions are less than feasible, it’s only the bigger companies that will stand while the smaller ones fade away due to the inability to raise enough capital to deal with the economic downturn that might occur.

Risk #3: Most of these small companies are based on an idea, and very often they fail due to the inability to hand over the governance of their company to a real professional who can bring the idea to fruition.

Risk #4: Perhaps the biggest reason as to why it is considered to be such a gamble to invest in these types of companies is because they have been in the market for only a short period of time. Thus, investors do not have any data to evaluate and forecast their performance for the future, which makes it very risky.