What is a Micro-Cap Stock? Everything You Need to Know!

by Amy Smith | Last Updated: April 30, 2020

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Definition of a microcap stock - what is a microcap stock

A microcap stock is a publicly traded company with a market value that is between $50 million and $300 million.  Oftentimes, microcap stocks share price is under $5 and can even be less than $1.  The stocks usually trade on OTCQX, OTCQB and Pink Markets. These stock market exchanges do not have many standards or requirements like number of board members, minimum assets, or a minimum number of shareholders.

These micro-cap stock companies have less resources than their counterparts. Thus, they do not have the ability to make a lot of information available to the public. Whereas larger companies hire investor relation firms to handle shareholders and communications as well as auditors.

A microcap stock is like a startup. Usually it is creating a new product or service that is untested and unknown to the vast public. Several blue-chip stocks start out as micro-cap companies and now are massive corporations because they proved to be successful. 

How Many Microcap Stocks (companies) are There?

Microcap Ishares ETF monthly price

There are about 1,500 microcap stocks on the Russell Microcap Index with a median market cap of $148 million. A scan on Stock Fetcher reveals over 2,000 microcap stocks. We run a filter for market capitalization between $50 million and $300 million. Here is a list of the top 15 microcap stocks in 2020

Anatomy of a Microcap Stock

Anatomy of a microcap stock dissected

There are lots of components that make up a microcap stock. We have broken down similar characteristics we’ve researched and seen in microcap stocks. They don’t always hold true, but the majority of the time they do. 

Trade on Any Exchange

Microcap stocks are publicly traded companies that can trade on any exchange from senior exchanges like the NASDAQ to lesser exchanges like the OTCQX. 

Lower Share Price

Share price is often less than $5. Thus many institutional investors or funds are not allowed to purchase shares because of this. However, there are many private investors who allocate a portion of their portfolio to high risk investments in the hopes of achieving a home run. If it fails, there is minimal impact to the overall portfolio.

Market Value

The market value of the company is between $50 million and $350 million. Anything lower than $50 million is considered a nano-cap stock. There are many differences between penny stocks and microcap stocks. The main difference is that a penny stock is determined by share price not by market cap.

Schemes, Schemes, and More Schemes

Microcap stocks are subject to pump and dump schemes, price manipulation, fraud, and other schemes that are harmful to the company and/or shareholders. They are real and here are the most noteworthy pump and dump schemes in the last few years. Keep an eye out and always research companies before you invest.

Low Volume

Low volume on average which can create problems for investors. This is known as “illiquid,” meaning it is hard to sell your stock even if you want to. So heed our warning and watch out.

Limited Requirements

Lesser exchanges like the OTC market have very few reporting requirements compared to senior exchanges like the NASDAQ or NYSE. In fact, there are no reporting requirements on the Pink Sheets market. All a company needs to do to get listed on the pink sheets is submit a form, entitled Form 211, with the OTC Compliance Unit.  Theoretically, anyone can become a publicly traded company via pink sheets.  

Research Can Be Difficult

Finding information on a specific microcap stock is hard. Companies that trade on lesser exchanges do not have as many mandatory reporting requirements as Apple or Google do. This makes it hard to decide whether the company is a fraud or not. Stick with microcap stocks that report earnings regularly and hold investor calls. This will keep you ahead of the curve and weed out most of the schemes. 

Little to No Analyst Coverage

Good luck finding any research for microcap stocks and be wary of the ones you find. Companies or an investor pay someone to put together a “research report” that puts the company in good light and then promote the heck out of it. Don’t fall for this. Very few microcap stocks have analyst coverage because they are too small and illiquid for large investors. 

Why Invest in Microcap Stocks

Microcap stocks are high-risk investments. As the saying goes, high risk = high returns. Hence why many people invest in microcap stock is the potential to make a ton of money from a single trade. There are plenty of reasons to invest in microcap stocks. It is simple, quick, and easy; just the click of a button. I mean, who doesn’t want bragging rights to say they tripled their money in a matter of weeks? 

No pain, no gain. High risk, high rewards. You only live once!

However, it is also just as easy to lose a ton of money.  There are lots of risks to investing in penny & microcap stocks as well. Many of these stocks are junk companies that can’t make it on senior exchanges. Others are deceiving investors with outright fraud. That’s not to say you can’t find the hidden gem or 10x bagger.

Still Want to Invest in Microcap Stocks?

If you still want to invest in microcap stocks, go for it! Make sure to learn how to invest in microcap stocks. There are definitely ways to increase your chances of finding a company that will turn into a multi-bagger. Use a microcap stock screener to weed out the junk stocks and make sure to do plenty of research before putting your hard earned money into a stock. I’ve seen people buy a stock because their friend recommended it. Don’t be like them!

Although there are a few hidden gem microcap stocks that make good investments, it is important to remember they are far and few between. Because of minimal financial reporting requirements, fraud and manipulation are common. Be cautious and safe.

Final Thoughts

Investing in microcap stocks is lucrative and rewarding if you know what you are doing. Educate yourself, get ahead of the curve, and learn. You will start to identify winning patterns in micro-cap stocks. Find what works: rinse and repeat over and over again. If you want to stay a step ahead of the crowd, sign up for our newsletter. It is FREE. You literally have nothing to lose and everything to gain. 

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