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Small cap stock investing is the investing of stocks which are capitalized at $300 million to $2 billion on a listed stock exchange. Small cap traders and investors face higher than average risks for the following reasons:
- Lack of liquidity
- Lack of news coverage
- Lower requirements for stock listing
Liquidity
Without proper liquidity a stock is subject to gaping prices that can be very adverse to traders. Less liquidity means wider price spreads that are an added cost. Also, trading firms can control the float that is traded, manipulating the price too easily.
Less news coverage
Many people base their investing and trading decisions on news and analyst coverage. The dissemination of constant news coverage means fluid stock price action. Investors are otherwise subject to adverse price gaps and mysterious revelations.
Lower requirements for listing
Stock exchanges and indices have certain requirements. They are such that stock investment returns are reasonably correlated to economic events and new discoveries. An example of an index requirement is historical company earnings on record. The S&P 500 will have certain requirements of recorded earnings that are greater than the Russell 2000 small cap index. This is true for other major requirements; such as, timely scheduled filings and average historical volume on record.
