9.7What are the risks of investing in small-cap stocks?
1What is it?
Small caps carry extra risks beyond normal market risk.
2Why does it exist?
Knowing them helps you size positions sensibly.
3Risks
- Volatility: 50%+ falls are not unusual.
- Illiquidity: hard to sell; lower circuits can trap you.
- Business risk: one product, one customer or one bad year can break them.
- Governance: weaker oversight; higher fraud risk.
- Manipulation: pump-and-dump schemes target small caps.
- Less information: fewer analysts and less media coverage.
4Practical use
If you invest in small caps, keep them a small part of your portfolio (many advisers suggest 10–20% at most, depending on your risk appetite), prefer diversified small-cap funds over single stocks, and hold for 7+ years.
5Quick revision
- Volatile, illiquid, less information.
- Keep allocation small.
- Prefer diversified funds.
6Knowledge check
Q1. Why can small caps trap investors?Show answer
Low liquidity and lower circuits.
Q2. Safer way to own small caps?Show answer
A diversified small-cap mutual fund.
Q3. What scam often targets small caps?Show answer
Pump and dump.