Some of the main disadvantages of small cap stocks are discussed below:
Low liquidity, difficult to sell: It is much easy to make the purchase of small cap stocks, however sometimes their prices drop too much, that it might be too difficult or even impossible to sell them back, especially if you own too many of them. When the prices plunge, some time it may prevail too many months, and Investors then have no other option but to wait for the stock value to recover or disappear completely. High risk investment: Mostly small cap stocks are offered by the companies who are new or some of them are near to bankruptcy, investment in both types of companies is much risky. If the new company does not get financial success, you can expect the stock prices to decrease drastically. In either case, you may lose your money over time. The investors who have many stocks, in case of lose, suffers much. Lack of Information: Small cap stocks are listed on two exchanges namely the OTC BB and Pink Sheets, none of both require rigorous financial reporting. There is much lack of valid information, so the investor hardly has any strong ground to base his decisions upon or compute the risk factor. This state of confusion might show the way to some very bad moves. Sometimes it happens that investment strategies turn to gambling and people lose all of their money they invested. Lack of Regulation: The U.S. Securities and Exchange Commission does not regulate small cap stocks the way it does other regular stocks. This is a big disadvantage, considering the amount of risk that small cap stocks already have.
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