What Is a Micro Cap?
Let me explain what a micro-cap is: it's a publicly-traded company in the U.S. with a market capitalization between about $50 million and $300 million. These companies sit above nano caps in terms of market cap but below small-, mid-, large-, and mega-cap corporations. Remember, a larger market cap doesn't always mean higher stock prices than those of smaller companies.
Key Takeaways
- A micro-cap is a stock with a market cap of between $50 million and $300 million.
- Micro-cap stocks tend to have greater volatility, thus are inherently riskier, than larger-cap stocks.
- There is limited information on micro caps, making research extremely important to avoid fraudulent stocks and other potential pitfalls.
- Another downside to micro caps is limited liquidity, due to the lack of analyst coverage and institutional buyers.
How a Micro Cap Works
Companies with less than $50 million in market cap are often called nano caps. Both nano and micro caps are notorious for their volatility, which makes them riskier than bigger companies. You calculate market capitalization by multiplying the stock's price by the total number of outstanding shares—this gives you the market value of the company's shares.
Microcaps carry a high-risk reputation because many lack proven products, solid history, assets, sales, or operations. Their low liquidity and small shareholder base can lead to massive price swings. With market caps between $50 million and $300 million, you as an investor should prepare for more volatility and risk than you'd see in large-cap stocks like those in the S&P 500. That said, in strong bullish periods, micro caps often outperform larger ones. For example, from 2011 to 2022, the Dow Jones Select Micro-Cap Index had annualized returns of 9.99%, compared to 11.13% for the S&P 500.
Special Considerations
While some U.S. micro-cap companies might get a big chunk of revenue from outside the U.S., most do all or nearly all their business domestically. This matters because purely domestic operations mean you don't have to worry about currency fluctuations or conversion risks affecting earnings.
Micro-Cap vs. Larger-Cap
Consider this: there are far more micro-cap stocks out there than large- or giant-cap ones. You won't find the same easy access to information as you do with big names like Apple (AAPL). Because of the limited info and sheer number of micro-caps, you need to research thoroughly to steer clear of fraud and other issues. Many micro-caps aren't required to file regular financial reports with the SEC, which makes digging deeper even tougher.
Criticism of Micro Caps
You'll find many micro-cap stocks on over-the-counter (OTC) markets like OTC Link LLC, not on national exchanges like the NYSE. These OTC companies don't have to meet minimum standards for net assets or shareholder numbers. Another issue you should watch is liquidity—micro-caps often lack regular analyst coverage and institutional buyers, leading to less trading volume than larger stocks.
In summary, micro-cap stocks offer a high-risk, high-reward setup for investors like you who are prepared to research deeply, including reaching out to the company directly for answers.
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