The Cons of Investing in Small Cap Stocks: The Argument from the Other Side

small cap stocks

So you want to invest. And with some research behind you, you’ve heard that small cap stocks could offer big opportunities. And they surely can.

However, there is a word that constantly runs in tandem with small cap stocks—risk. Some would argue that too many stars need to align for these stocks to bring in big bucks for you.

While there are reasons to invest in small cap stocks, there are also reasons you shouldn’t.

Let’s have a look at the cons of small cap stocks. Some food for thought before you dive right in there and get your heart broken.

The Cons of Small Cap Stocks

Risk

Investing in any kind of stock poses a risk. That’s the nature of the game. However, the risk is greater with young companies. Small cap companies tend to mean infancy, inexperience, and the potential making of business decisions that pose risks. It also means a lack of cash flow and expendable capital for growth.

One of the hardest hills for any business to climb is getting established. If you are investing in small cap stocks, you may be investing during the riskiest part of a company’s life.

There more than likely won’t be an established, loyal customer base, and therefore small caps are more vulnerable to consumer preference changes.

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Flippant Investors

It’s easy to be swayed by flippant investors. Many people out there can afford to take a risk, but maybe you can’t.

When a stock is at a low price, it’s easy to flippantly throw money into it.

It’s easy to believe that the market volume around a stock is a sure sign that this company is doing good things. But ask yourself, is it just a fad perhaps? Or simply trendy?

For some, losing $1,000 on small cap stocks isn’t a big deal. But would it be to you?

Insignificant Gains and Long Term Hold

If you want to see gains from these stocks, then you better be in it for the long haul. It can take years and years for a company to make a significant return for investors.

Take Amazon (NASDAQ:AMZN) for example, now worth nearly $2,000 per share, this stock could be bought for less than $2 in 1997. But those extravagant highs have taken over 20 years to reach.

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And that’s if a company gets there; reaching those heights is rare. Many stars have to align for a stock to grow significantly from its penny stock prices of old.

So don’t expect small cap stocks to turn you into a millionaire over-night. You’ve got to have patience, and lots of it, in this game.

A Lack of News and Data

What’s going on with the company you’ve put your money into? Small companies are rarely talked about.

As such, you may feel left in the dark.

What exactly is the company doing with your money? Are they achieving what they set out to? Is the CEO even the same?

As these are, usually, relatively new or unknown companies, news and factual data about them can be hard to find. Making an informed evaluation of small cap stocks is, therefore, more difficult for potential investors.

Conclusion

So there you have some cons to think about before diving right into small cap stocks. As with anything, do your research first and make sure you can afford to lose what you are willing to put in.

Happy stock hunting!

Featured Image: Depositphotos/© almagami

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