Small Cap Stock Trading – Advantages & Disadvantages

Friday, May 18, 2007

Small Cap Stock Trading – Advantages and Disadvantages

Small or Mini or Micro cap stocks are so popular in these days. They are stocks from companies which hold very small part of their respective markets. The term Small cap stocks is often misused with penny stocks, one of the riskier equities to trade. According to experts, there are both advantages and disadvantages of trading small cap stocks over trading large and mid cap stocks.

Advantages of Small Cap Stock Trading

Small cap stocks are much less priced than large and mid cap stocks. So trader can trade more number of stocks with less money.
Small cap companies show faster growth rates than well-established large companies.
Offers more return on investment than large companies.
Good for day trading if trading volumes are sufficient.
Good for novice traders to sharp their abilities.
Small cap companies are keener in their business areas and future developments with minimum wastage of resources.

Disadvantages of Small Cap Stock Trading

Riskier than mid and large cap stocks, which have fairly stable prices.
Markets are highly volatile with news and disasters.
Small cap stock trading yields lesser dividends, as most companies invest their earnings to grow more.
There may be lack of sufficient company information.
The trader himself has to execute the trades as there will be lesser support from brokers and advisors.