What is Microcap?
The term “microcap,” also known as micro-cap, is generally used for companies with a low market capitalization, usually ranging between $50 million and $300 million. Market capitalization is the product of a company’s share price and its outstanding shares, and it changes daily.
Microcap stocks can either be newly listed companies with very few regulations or smaller companies with significant potential to become large-cap stocks in the future. While the categorization of stocks by market capitalization can vary between different market participants, stocks are usually classified as per the below categories:
- Microcap is a general term used to define stocks with a market capitalization of between $50 million and $300 million.
- Microcap stocks are usually traded over-the-counter, with ave low publicly available information, and are riskier to invest in than large-cap stocks.
- Investors must be cautious while investing in microcap stocks and must only invest after conducting thorough due diligence on the stock they want to invest in.
Table of Classification according to Market Capitalization
|Classification||Market Capitalization Range|
|Large-cap||Greater than $10 billion|
|Mid-cap||$2 billion to $10 billion|
|Small-cap||$300 million to $2 billion|
|Micro-cap||$50 million to $300 million|
|Nano-cap||Less than $50 million|
Features of Microcap Stocks
1. Lack of public information
The biggest difference between microcap stocks and stocks with higher market capitalization is the accuracy of the publicly available information about the company. Most large public companies file their reports with the national regulator, which can be easily accessed on the regulator’s website by any investor. Also, large-cap stocks are regularly researched on and written about by equity analysts, and their stock price is easily available on the internet.
However, similar information is seldom easily found publicly for microcap stocks. Many of the microcap companies do not file their reports with their respective regulator, making it difficult for investors to get relevant information.
2. High risk
Investing in stocks, in general, involves a certain amount of risk. However, microcap stocks come with a higher risk than large-cap stocks. Many of the microcap companies are new and do not have any historical information. Some may not have any significant revenues either because their products are in development or not yet launched in the market.
They are characterized by low trading volumes, which makes it difficult for an investor to sell his/her investment when he/she wants to do so. Due to low trading volumes, any large sell-off directly will significantly impact the stock price. The companies are also prone to fraud and corporate governance issues.
3. No minimum listing standards
Every company that intends to list its stock on the exchange must meet the minimum listing standards set by the exchange. The requirements can range from holding a certain minimum value of assets to a minimum number of shareholders.
Microcap stocks do not need to meet such listing requirements. However, at times, companies whose securities are quoted in the OTC market may need to meet the minimum criteria imposed by the trading system.
4. Traded over the counter
Microcap stocks lack the liquidity and listing requirements of large-cap stocks; hence many are traded in the over-the-counter (OTC) market. Over-the-counter means that the stocks are not traded on the exchange but rather are directly traded between the broker and the dealer or on OTC systems.
5. Potentially high rewards
The trade-off with investing in microcaps is that with the higher risk, there is a possibility of higher rewards if the company becomes a multi-bagger. Finding such multi-baggers requires a thorough due diligence process by the investor. Almost every large-cap stock today began its journey as a small company.
An investor must understand the company’s financials, its business strategy, and future potential, and only then decide to invest in the company. Once the due diligence is completed, an investor must be patient with the investment, as the share price of smaller companies is highly volatile and sensitive to market sentiments.
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