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More info? Download a brochure. The higher the volatility, the riskier the investment. Since the long-term future of small firms is hard to predict, small-cap stocks tend to swing more wildly than large-cap stocks. This clearly shows that small-cap stocks—as represented by the Russell Index—are consistently more volatile than the overall market. So, if you want exposure to small caps, make sure you have a long enough time horizon to navigate through the turbulence.
Business risk is the exposure of a company to factors that will lead to lower revenue and earnings. On this front, small-cap companies carry both a higher risk of business and default risk. Well, while massive blue-chip businesses like Apple and Disney have the financial muscle and brand power to live on for decades, small startups typically have unproven business models , inexperienced management teams, and limited financial resources.
This makes small firms far more susceptible to factors such as a downturn in the economy, a spike in costs, and intense competition from much larger companies. For every David and Goliath success story, there are far more situations where the little guy gets crushed. As a small-cap investor, you have to accept that fact and be able to play the numbers game. Liquidity risk refers to the extent to which an asset can be bought or sold quickly without significantly impacting its price.
This results in investors having to buy their small-caps at higher prices than expected and selling small-caps at lower prices than expected. Small-cap stocks offer tremendous hidden opportunities to make money due in large part to their lack of coverage from Wall Street analysts and institutional investors. But on the flip side, this lack of coverage makes it difficult to obtain quality research and information on small-cap companies. The consequences are twofold:.
If you want to dive into the small-cap space, you have to be able to embrace the uncertainty that comes with a lack of information. As of Oct. And here is the index's sector breakdown by weight as of Oct. Accessed Oct.
State Street. Magnify Money. ETF News. Stock Markets. Index Trading Strategy. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Table of Contents. Small-Cap Investing Risks. Markets US Markets. The main reason to invest in small caps is that they have more room to grow than large caps. Small-cap stocks have different characteristics than mid-cap and large-cap stocks, giving small-cap stocks significant diversification benefits.
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