What type of stock has greater risk and often does not pay dividends?

The correct answer identifies small-cap stocks as having greater risk and often not paying dividends. Small-cap stocks represent companies with smaller market capitalizations, typically under $2 billion. These companies are often in earlier stages of growth or in new industries, which can lead to higher volatility in their stock prices. Because they are still establishing a solid revenue base, many small-cap firms reinvest their profits into the business for growth rather than distributing them as dividends to shareholders.

As small-cap stocks tend to be less stable than their larger counterparts, investors may encounter more price fluctuations. This increase in risk is associated with many small companies facing challenges in establishing market presence or competing with larger corporations. However, the potential for growth often attracts investors despite these risks.

In contrast, large-cap stocks are typically more stable and provide regular dividends because they belong to well-established companies with mature business models. Value stocks are those that appear to be undervalued compared to their intrinsic worth, and they may or may not pay dividends depending on the individual company. Blue chip stocks are shares in large, reputable companies known for stability, reliability, and often provide dividends.

Understanding this distinction is crucial for investors looking to balance their portfolios according to risk tolerance and income needs.