Micro Cap - Explained
What is Micro Cap?
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Table of ContentsWhat is Micro Cap?How is Micro Cap Used?U.S. Micro Caps More Reliant on Health of Domestic EconomyLess Liquidity and Readily Available Information Than Larger Companies
What is Micro Cap?
A micro-cap is a term that describes a publicly-traded company with a market capitalization that is over $50 million, but less than $300 million. In the United States, a public company that worths between $50 million and $300 million is a relatively small company but bigger than publicly traded companies that have nano-caps stocks. Generally, brokers and analysts classify stocks of public companies into five categories of market capitalization, these are; large-cap, mid-cap, small-cap, micro-cap, and nano-caps.
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How is Micro Cap Used?
The market value of the outstanding shares of a company is referred to as market capitalization, this shows the actual worth of a company in terms of its stocks. A micro-cap company is a publicly-traded company with a market capitalization of more than $50 million but less than $300. Although stronger than a nano-cap company whose market capitalization is less than $50 million, micro-cap companies are relatively small and have a high degree of volatility. Market analysts and Financial experts often refer to both nano-cap and micro-cap companies as volatile companies given their high level of risk.
U.S. Micro Caps More Reliant on Health of Domestic Economy
Micro-cap stocks or companies are associated with a high level of risk given their limited assets, limited sales and operations and a limited number of shareholders. Investors of micro-cap stocks must be willing to accept the higher risks associated with them as well as their benefits. In the United States, micro-cap companies trade domestically, only a few of these companies have a significant portion of their revenue generated from places outside of the United States. Since these companies are domestic, they are able to advert some risks such as currency fluctuations, taxes of foreign income, among others.
Less Liquidity and Readily Available Information Than Larger Companies
There are some benefits investors of micro-cap companies stand to gain, the major one is increased performance of micro-cap stocks during bullish trends. More often, the number of micro-cap stocks outweighs the number of large-cap stocks, leaving many investors to choose between the few mega- and large-cap stocks and the numerous micro-cap stocks. However, selecting credible micro-cap stocks in the market has become a daunting task for many investors given that most of these stocks have limited information and can easily be perpetrated by fraudsters. One major drawback of micro-cap stocks is the lack of regular financial reports with the SEC work makes their verification more difficult for investors. When researching about micro-cap stocks, not only do investors need to battle limited information, they also need to pay attention to their liquidity. Micro-cap stocks are commonly traded on the over-the-counter (OTC) markets, they are not traded on a national exchange. Micro-cap stocks are often associated with high risk but also offer juicy returns to investors who are able to take the pain to research their investment.