Micro-Cap Stocks Definition
Micro-cap stocks are those category of stocks whose market capitalization is generally between $50 million to $300 million. Such stocks have market capitalization greater when compared to Nano-cap companies but are generally lesser than small-cap, mid-cap and large-cap companies.
Explanation
Micro-cap sticks will generally tend to possess higher volatility, which means it has more risk associated with it. Thus these stocks are usually considered to be riskier than large-cap companiesLarge-cap CompaniesLarge-cap stocks refer to stocks of large companies with value, also known as the market capitalization of 10 billion dollars or more, and these stocks are less risky than others and are stable. They also pay a good dividend and return, and it is the safest option to invest.read more. These companies are generally preferred for intra-day trading due to the volatility feature it has, which makes rapid price changes to the stock. Because of these massive fluctuations, they are also considered to be riskier. One can easily make quick money utilizing the volatility and, in the same way, lose a lot of money too. One disadvantage of these stocks is that minimal information is available for these categories of stocks. Thus one must be very careful to avoid bogus stocks and other pitfalls associated with it. The other disadvantage of micro-caps is that liquidityLiquidityLiquidity shows the ease of converting the assets or the securities of the company into the cash. Liquidity is the ability of the firm to pay off the current liabilities with the current assets it possesses.read more attached to the stock is very limited because very few analysts will provide coverage for these kinds of stocks, and the absence of institutional buyers investing in these stocks adds upon the liquidity problem.
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Source: Micro-Cap (wallstreetmojo.com)
Example of Micro-Cap Stock
An example of a micro-cap stock that is traded in NASDAQ is Peoples Financial Services Corp. This company was founded in 1905 and is headquartered in Pennsylvania, USA. The market capitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more of this stock as of the current market chart stands at $284.5 million, which successfully fulfills the criteria of micro-cap. The current share price of the same is $38.71. The total volume of shares being traded at the market is approximately 7 million.
Why does Micro-Cap Matter?
The following reasons will guide us why micro-caps should also co-exist along with other small, mid, and large caps:
- Micro-caps have unlimited growth potential if proper stocks are chosen after doing some self-conducted research. Some world-famous companies started as micro-caps and grew potentially from that level to become large caps today. The return generated by the same is tremendous, and within a period of time, can make a person amass a lot of wealth. Finding one such value-added stock can be a blessing for every investor.
- Micro-caps have long-term sustainability attached to it. It attracts less attention to Wall Street because they, unlike large-cap, don’t have to make immediate sacrifices to keep their shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more happy by putting their long-term goals to stake. These companies, therefore, are more concerned and worried about their long-term goals rather than short term objectives or shareholder happiness.
- These companies are often efficient and have a focused business approach because of their age as they are relatively new and strive to give their best. They operate very efficiently and are very focused on growing their business. Thus, on account of this attribute, they are also easy acquisition targets. If some big companies observe their potential, they will always be interested in acquiring such small companies with a visionary approach.
- They are potentially undervalued stocks, and these companies are also acquisition targets because every large-cap company will try to take advantage of their low valuation. Still, the good prospect to bring it under their shed. Thus, even for investors, micro-caps play a boon if appropriately chosen. They have great potential for generating hefty returns.
Investing in Micro-Caps
Few features of investing in micro-caps are as follows –
- One must know that very little public information is available for these stocks as few analysts will provide coverage for the same. Thus, reliable information for the same is not readily available. Many micro-cap companies also do not file their report with the regulators making it more difficult for investors to accumulate information.
- One must keep in mind that micro-caps are generally high-risk stocks, and thus where the potential to earn is enormous, the same concept goes for the potential to lose. They are also relatable to low trading volumes, and any large sell signal will directly impact the price of the stock.
- Micro-caps are also traded over the counter or the OTC marketOTC MarketOTC markets are the markets where trading of financial securities such as commodities, currencies, stocks, and other non-financial trading instruments takes place over the counter (instead of a recognized stock exchange), directly between the two parties involved, with or without the help of private securities dealers.read more because few stocks lack liquidity and listing requirements. Thus, we will find many such stocks on an OTC basis and not listed on any exchange.
- If chosen properly, a value-generating stock can generate huge returns to the investors over a period of time. Thus, micro-caps are said to have a vast potential to generate a return.
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