Small caps have an inherent risk which is technical in nature but it still can be a big headache, if one is caught on the wrong foot. A number of these small caps stocks have limited floating stock, which means a bout of demand can lead to a sharp rise in prices, which is good in bullish times, but at the same time if there is a small bout of selling at a time when valuations are high, there is hardly any buyer. So, the risk of these stocks moving downward circuit to circuit. If in doubt, just look at what happened in March this year. That is the risk which probably made the market regulator give advice to mutual funds to put some restraint on collecting money in their small cap schemes. But by April, some of them are making a comeback. For all those die hard small and micro cap fans, one basic principle should be remembered. Investing is about taking stake in a business and that business should have growth prospects and management should be transparent.
