Why is it more risky trading in stocks with low market capitalisations than large caps?

Well, quite simply it all boils down to the underlying liquidity and this in practice means the ease with you can get in and, more importantly, out of trades easily and at a good price. The more liquid the share, the greater the number of market participants (buyers and sellers) and thereby the easier it is for a spread trader to buy a certain number of stock at a particular price.

In contrast when shares are illiquid, there are few shares changing hands so it becomes much harder to deal. Suppose one wanted to buy £50 per point of XYZ Company at the present market price of 190p, which is the equivalent of buying 5,000 shares. However XYZ Company is a small cap stock and illiquid, and there are only 2,500 shares available at 190p and another 2,500 available at 198p. This implies that you have to buy the equivalent amount at a volume-weighted price of 194p, which is more 4p more expensive than the prevailing market price. With some very illiquid shares, the volume-weighted average can be even worse and it would be equally difficult to sell. In some instances, there may be even no investors willing to buy or sell, meaning that you can’t even deal.