When you are eyeing small-cap stocks, a number of positive factors weigh against some negative attributes. Below we have outlined three of the most compelling reasons why small caps deserve representation in many investors' portfolios.

Most successful large-cap companies started at one time as small businesses. Small caps give the individual investor a chance to get in on the ground floor. Everyone talks about finding the next Microsoft, Wal-Mart or Home Depot, because at one point these companies were small caps, diamonds in the rough if you will. Had you possessed the foresight to invest in these companies from the beginning, even a modest investment would have ballooned into an extravagant sum.

Because small caps are just that, companies with small total values, they have the ability to grow in ways that are simply impossible for large companies. A large company, one with a market cap in the $1 billion to $2 billion range doesn't have the same potential to double in size as a company with a $500 million market cap. At some point you just can't keep growing at such a fast rate or you'd be bigger than the entire economy! So if you are looking for high-growth companies, small caps offer this.

It isn't uncommon for mutual funds to invest hundreds of millions of dollars in one company. Most small caps don't have the market cap to support this size of investment. In order to buy a position large enough to make a difference to their fund's performance, a fund manager would have to buy 20% or more of the company. The SEC places heavy regulations on mutual funds that make it difficult for funds to establish positions of this size. This gives an advantage to individual investors who have the ability to spot promising companies and get in before the institutional investors do. When institutions do get in, they'll do so in a big way, buying many shares and pushing up the price.

This third attribute of small caps is very important. What we are saying here is that small caps often have very little analyst coverage and garner little to no attention from Wall Street. What this means to the individual investor is that, because the small-cap universe is so under-reported or even undiscovered, there is a high probability that small-cap stocks are improperly priced, offering an opportunity to profit from the inefficiencies caused by the lack of coverage devoted to a particular area of the market.

Often much of a small cap's worth is based on their propensity to generate cash, but they have yet to scale their business model. This is where much of the risk comes in. Not many companies can replicate what U.S. retail giant Wal-Mart has done, expanding from essentially a mom-and-pop store in Arkansas to a nation-wide chain with thousands of locations. Small caps are also more susceptible to volatility, simply due to their size - it takes less volume to move prices. It's common for a small cap to fluctuate 5% or more in a single trading day, something some investors simply cannot stomach.

Finding time to uncover that small cap is hard work - investors must be prepared to do some serious research, which can prove a deterrent. Financial ratios and growth rates are widely published for large companies, but not for small ones. You must do all the number crunching yourself, which can be very tedious and time consuming. This is the flip side to the lack of coverage that small caps get: there are few analyst reports on which you can start to construct a well-informed opinion of the company. And because there is a lack of readily available information on the small-cap company, compared to large caps like GE and Microsoft which are regularly covered by the media, you sometimes won't hear any news for weeks from many smaller firms.

There is certainly something to be said for the growth opportunities that small-cap stocks can provide investors; however, along with these growth opportunities come increased risk. If you are able to take on additional levels of risk relative to large-cap companies, exploring the small-cap universe is something you should look into. Alternatively, if you are extremely risk averse, the rollercoaster ride that is the stock price of a small-cap company may not be appropriate for you.