Investing in small-cap stocks can offer significant growth potential, but it also comes with certain risks that investors should carefully consider before allocating funds. Small-cap stocks refer to the shares of companies with relatively low market capitalization, often ranging from a few million to a few billion dollars. Here are some of the key risks associated with investing in small-cap stocks:

1. Volatility: Small-cap stocks tend to experience higher volatility compared to larger, more established companies. This volatility can lead to rapid price fluctuations, making it challenging for investors to predict short-term price movements.

2. Liquidity: Small-cap stocks often have lower trading volumes, which can result in limited liquidity. This means that it may be difficult to buy or sell shares at desired prices, potentially leading to higher bid-ask spreads and increased trading costs.

3. Limited Resources: Small-cap companies generally have fewer resources, including financial reserves and personnel. They might face difficulties during economic downturns or if they encounter unexpected challenges, potentially affecting their ability to weather tough times.

4. Higher Risk of Failure: Smaller companies typically have a higher risk of failure compared to larger, more established firms. They might lack the brand recognition, competitive advantages, and financial stability needed to navigate competitive markets.

5. Information Availability: Smaller companies might not have the same level of analyst coverage or readily available information as larger companies. This can make it harder for investors to conduct thorough research and make informed decisions.

6. Market Manipulation: Due to lower trading volumes and liquidity, small-cap stocks can be more susceptible to market manipulation or price manipulation attempts by unscrupulous individuals or groups.

7. Regulatory Risk: Smaller companies may face challenges complying with regulatory requirements, potentially leading to legal issues or unexpected costs.

8. Lack of Diversity: Investing in small-cap stocks can lead to a lack of sector and industry diversification in an investment portfolio, increasing overall risk exposure.

9. Long-Term Performance Uncertainty: While some small-cap stocks might achieve exceptional growth, others may struggle to sustain profitability over the long term, leading to inconsistent performance.

Investors considering small-cap stocks should perform thorough due diligence to understand the company's financials, management team, competitive positioning, and growth prospects. It's also important to diversify a portfolio to mitigate the risks associated with investing solely in small-cap stocks. Due to the higher risk profile, investors should carefully assess their risk tolerance and investment goals before allocating a significant portion of their portfolio to small-cap stocks.

Investing in small-cap stocks carries significant potential rewards but also comes with notable risks. Small-cap companies typically have lower market capitalisation, limited resources, and less established business models compared to large corporations. This makes them more vulnerable to market volatility and economic downturns. Prices of small-cap stocks can swing widely in short periods, which may create opportunities but also increase the chance of losses.

Liquidity risk is another factor, as small-cap shares often have lower trading volumes. This can make it harder for investors to buy or sell at desired prices. Additionally, smaller firms may face challenges in accessing financing, scaling operations, or competing with larger players. Their financial disclosures and analyst coverage are often limited, leaving investors with less information to base decisions on. While small caps can deliver high growth, they require careful research and a higher tolerance for risk.