What is Micro Cap?
Market capitalization ranks stocks into a number of distinct groups. Micro cap stocks are in the bottom rank and represent companies whose total market capitalization is less than 50 million US dollars (USD). Some add an even smaller rank called nano cap stocks.
Market capitalization is the product of the stock price and the number of stock shares issued, so if XYZ company has issued one million shares and the stock price is 0.30 USD, then its market capitalization is 300 thousand USD and XYZ company is a micro cap company. Its stock shares would be considered micro cap stocks. Micro cap stocks are also sometimes referred to as penny stocks.
This micro cap ranking is important when considering an investment in a particular company. Each rank has certain stereotypical features. Micro cap stocks are very risky. Micro cap stocks are the stock shares of companies that are just getting started.
The market for micro cap stocks can be very small, and while you can purchase the stock, you may find difficulty selling it. Micro cap stocks are subject to very large swings in price since the volume is very small. Micro cap stocks are also subject to price manipulation; since the market is small, a single investor can influence the price of the micro cap stock to their own profit at the expense of the other investors.
Getting accurate information on micro caps stocks can also be very difficult. Since the market for micro cap stocks is small, the media does not pay much attention to these companies. This results in little information getting out about the micro cap company, and the information that does get published can be easily manipulated to the advantage of the person releasing the information. Many of the checks and balances that are in place with large cap stocks are simply not there for a micro cap stock.
It is doubtful that micro cap stock should be a part of your investment portfolio unless you are a very experienced investor. While the possibility of a very large return is present -- after all every company started out as a micro cap stock -- the risk of a complete loss of your investment is also very high.
Written by John Sunshine
