Small-cap stocks are issued by companies with a market capitalization that typically ranges between $300 million and $2 billion. These stocks are generally more volatile than larger-cap stocks, which makes them react more wildly to investor sentiment. The ability of these stocks to make quick gains and losses makes them risky and leads to high-pressure transactions for investors hoping to buy or sell.
Raising Capital to Fund Growth
Small-cap companies often have promising ideas and innovations, but it takes money to get their products to market. To fund operations and continue product development, many small caps will either sell shares to raise money or take on debt. Selling shares to raise capital is commonly called stock dilution; as more shares flood the marketplace -- typically at lower prices -- investors react and many use high-pressure sales tactics. Taking on more debt also alarms investors who want to invest in a company with a clean balance sheet.
Product Failure or Product Launch Delays
Launching new products can be costly to any small-cap company. When any new product is met with resistance on its path to market, high-pressure selling can be the usual outcome. Much of the value of a small-cap company is in the potential of its products to advance to the stage of revenue generation. Any event that impedes this progress is detrimental to the company's success and causes many investors to jump ship. Products can also fail, as when the Food and Drug Administration rejects a new drug, and the wasted time and money will cause high-pressure selling.
Reverse Stock Split
Many small caps encounter problems with share prices that are too low to meet listing requirements for trading on major exchanges, such as Nasdaq or the New York Stock Exchange. Some initiate reverse stock splits to increase the value of stocks and allow them to continue listing when share prices dip too low. This can often trigger selling pressure if investors interpret this activity as evidence that shares have not achieved enough growth in valuation. Reverse stock splits can lead to compliance with the exchange in question, but it can also hint that shares have been not been performing and are unlikely to recover in the near future.
Poor Quarterly Results or Downgrades
Small caps are small for a reason, and most investors are not looking for a major profit. Problems arise when small caps experience losses that are greater than expectations or surprise analysts who are watching the stock. If the quarterly results are significantly worse than expected, analysts might downgrade the stock and cause selling pressure. An analyst downgrade is a mark of diminished support for the stock within the investor community, and this can provoke high-pressure selling.
Craig Keolanui is a small business entrepreneur with more than 23 years of experience owning and operating small businesses in the restaurant, business services and retail industries. He works as a small business consultant assisting with finance, marketing, planning and business writing projects and requirements.