You are smaller than the average for all species. As a small individual you are not as well equipped to resist poisons, injuries and alcohol. You use the trait every time your diminutive size might be a factor. This trait reduces your encumbrance limit by 1kg per step of the trait. If you have -2, your encumbrance limit is 10 kg instead of 12 kg. For every level of this trait, you are half a foot shorter than average. A character with Big cannot take this trait without first getting rid of the other.
At -3 and below, your Reach in melee decreases by one full step. So Long becomes Normal, Normal becomes Close etc. Note that this only affects the reach of the character and their weapon. It does not magically give close-ranged weapons grappling ability. Grappling rules still apply.