What is the primary disadvantage of small-cap stocks?

The primary disadvantage of small-cap stocks is that they can exhibit high volatility. Small-cap stocks, which represent the shares of smaller companies, tend to be more sensitive to market changes and economic fluctuations. Their lower market capitalization can lead to larger price swings compared to large-cap stocks, making them riskier investments for those who cannot tolerate significant fluctuations in value.

Investors may experience rapid increases in stock price but may also suffer substantial declines in a short period. This volatility can stem from various factors, including limited financial resources, less market data available about these companies, and sensitivity to market sentiment. Understanding this volatility is crucial for investors, particularly for seniors or those nearing retirement, who may be more risk-averse and prefer stable investment outcomes.

The other options present characteristics that do not typically serve as primary disadvantages. High liquidity is generally an advantage, while requiring a long-term commitment is not a disadvantage but rather a strategy that applies to many investments, particularly growth-oriented ones. The assertion that small-cap stocks are typically safer investments is inaccurate, as these stocks are known for their increased risk profile compared to more established companies.