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What Is a Micro-Cap Stock?

Microcap stocks are shares of a company that has a market cap between $50 million and $300 million. They are known for being high-risk due to the fact that micro-cap stocks are seen as unreliable, revenues are inconstant, and operating systems in place are not yet solidified.

They are also vulnerable to large market shocks due to a lack of liquidity and a limited shareholder base. To make the most out of their investment, investors must be prepared for increased uncertainty and risk.

How Do Micro-Cap Stocks Work?

The term “nano-cap” applies to businesses with a market capitalization of less than $50 million. Nano and microcap firms are notorious for their uncertainty, and as a result, they are seen as less stable and riskier than companies with greater market capitalization.

However, micro-caps appear to outperform their larger peers when the level of risk between the micro and large-cap stocks are the same. This is known as the small firm effect.

What Is the Market Capitalization of Micro-Cap Stocks?

A company with micro-cap stocks would have a market capitalization of less than $300 million but they usually are around $50 million.

How To Find Micro-Cap Stocks

Micro-cap stocks outnumber large-cap stocks on the exchange by a large margin. Stock values for firms with greater market capitalizations are not necessarily higher than for companies with lower market capitalizations. You could potentially come across a tremendous microcap stock that’s just getting started and starts to rapidly grow.

The microcap could expand into a large-cap business and as an early investor, you could benefit from capital growth, or the value of your stock could go up and you could profit from the returns on investment.

What Are Micro-Cap Stocks Used for?

If you’re a buy-and-hold investor, you may find microcap stocks that are significantly undervalued which you can profit from. This strategy entails purchasing undervalued stocks at a discount and keeping them for a long period of time.

The opportunity for share price growth as the shares finally expand by leaps and bounds is the payoff once again. The scale of these stocks allows them to be more effective and ideal investments.

How Do Micro-Cap Stocks Affect the Economy?

Micro-cap stocks are seen as a positive in the eyes of an economist and are often eligible for government funding of loans or grants. This is because small businesses are a driving force of new job growth and creating new job opportunities in the economy.

While micro-cap stocks can help improve the economy it is important to remember that in times of economic downturn or recession, micro-cap stocks are seen as riskier or less attractive.

Characteristics of Micro-Cap Stocks

Microcaps have various characteristics and features that allow investors to buy and sell these stocks to earn a net profit.

Very Risky

Stock investing will always have a certain degree of risk that you can prepare for. The vulnerability of micro-cap stocks is greater in comparison to other securities because many of the micro-cap firms are relatively young and don’t have a solid track record for investors to look back at.

With their lower liquidity as well, it can be challenging for one who is risk-averse to invest in micro-cap stocks. 

OTO Trading

OTO stands for one trigger other. This is a kind of buy/sell order commonly utilized in trading micro-cap stocks.

OTO trading is an order where when the first order is executed, a second-order automatically follows. Both orders act according to the settings you put in place.

Lack of Minimal Listing Requirements

Any business that wants to list its shares on an exchange must meet the exchange’s minimum listing requirements. The conditions can be based on a minimum market valuation and shareholder numbers.

Micro-cap stocks do not have to follow these criteria in order to be listed. This can enhance the riskiness of micro-cap stocks and further dilute investor confidence based on data.

Downsides of Investing in Micro-Cap Stocks

There are various downsides to investing in micro-cap stocks such as dealing with the lack of a dividend payout, low liquidity, and the high volatility of these stocks.

No Dividend Payout

Microcap stocks are less likely to pay dividends, making them less than suitable for income-oriented portfolios. It’s likely that the firm would pay dividends to investors as it expands, but it will necessitate sticking with a micro-cap stock for the long term. 

Liquidity

These stocks pose a liquidity risk because, on average, they have a lower market volume than larger firms. If you’re worried about being able to liquidate your shares as you need to, microcap stocks might not be for you.

Very Volatile

Micro-cap stocks are known for their high volatility. This can be attributed to the fact that micro-cap stocks usually come from newer businesses.

These businesses often times have yet to solidify their position in the market as well as their financial standings. Sometimes, micro-cap companies can still have further product developments they need to finish or other projects that need funding.

Overall, because of the stage in the business cycle that most micro-cap stocks are currently in, their share prices will be highly volatile.

Why Invest In Micro-Cap Stocks

Investing in microcaps comes with a higher cost, but it also could potentially lead to huge returns. Before agreeing to invest in a stock, an investor must understand the future forecast of the stock and know what they plan to do with this investment.

Where to Trade Micro-Cap Stocks

Micro-cap stocks are traded the same way as other stocks on the market however they are not traded on national securities exchanges. Here are a few options for how to trade micro-cap stocks.

OTC Link LLC

OTO Links provide investors with an interface to handle their market-making and stock trading operations online. You are able to negotiate trades and communicate with other traders about exchange prices.

OTO Link LLC is a quotation system that delivers quotes from brokers that hold and handle over-the-counter securities.

OTC Bulletin Board

An OTCBB is an online quotation service that will provide you with data on over-the-counter stocks. This platform provides quotations only and you will not be able to buy and sell directly through an OTCBB.

Over-the-Counter

Many traditional brokerages like Fidelity and TD Ameritrade allow for the trading of over-the-counter stocks. An over-the-counter stock refers to a security that is not listed on national exchanges but handled through brokers and dealers.

All micro-cap stocks are traded over the counter.

Financial Advisors Can Help You Trade Stocks

Micro-cap stocks outnumber large-cap stocks on the exchange by a large margin. A company with micro-cap stock would have a market capitalization of less than $300 million but they usually are around 50 million.

While micro-cap stocks pose a large risk, there is of course potential for large returns. Financial advisors can help guide you in investing in micro-cap stocks to help ease the intimidation from the large risk you are about to take.

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Join The Finance Super App - M1 Finance!

The finance super app! Yours to build. Invest, borrow, and spend with one easy-to-use platform. Get the most out of M1 when you sign up for a one-year free trial of M1 Plus (a $125 value).