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A micro-cap stock is a stock with a total market capitalization between $300 million and $2 billion. Microcap stocks are often smaller, less established operations. But these companies have unlimited potential to become mega-cap stocks in the future.
Microcap stocks often appeal to investors with higher risk tolerance because they can change price quickly. Take note if you are a value investor, as many of these stocks are sub-$20 stocks.
Be sure to do your homework if you are considering investing in micro cap companies. Our guide to micro-cap stocks will help you evaluate micro-cap companies and suggest some stocks to watch out for.
Overview: Micro Cap Stocks
A micro-cap stock is a stock with a market capitalization between $300 million and $2 billion. You can calculate a company’s total market capitalization by multiplying its current stock price by the number of shares outstanding. Micro-cap stocks are usually issued by small companies that are not known.
Micro-cap stocks have a number of advantages, including:
- More profit potential: Micro-cap stocks can be hot stocks under $5. If you have limited capital to invest, investing your money in strong micro-cap companies can give you more profit potential.
- Higher growth potential: The larger a company’s market capitalization, the more difficult it is to post significant growth year after year. Micro-cap stocks can grow more efficiently, resulting in greater returns on your investments.
- More volatility: Although this may not be a very attractive feature if you are a long-term investor, micro-cap stocks also tend to show more volatility than larger companies. Day traders and scalpers often turn to microcap stocks when they want to capitalize on drastic daily price movements.
Investing in microcap stocks is significantly riskier than investing in larger companies. It can be more difficult to find information on micro-cap stocks compared to large and large-cap stocks because fewer experts provide analysis reports. Micro-cap companies can also fail or fail without notice, which can result in significant capital losses. Because there are fewer buyers for micro-cap stocks, price manipulation and fraud are not uncommon.
Best Online Brokers for Micro Cap Stocks
Beginning your trading journey starts with opening a brokerage account. As an ordinary investor, you cannot buy or sell shares directly. Instead, you must use a broker, financial professional, or licensed firm to buy and sell securities on your behalf.
If you don’t have a brokerage account yet, consider one of our favorites below.
Features To Look For In Micro Cap Stocks
Microcap stocks are associated with more risk and a higher rate of failure than larger companies. To protect your investment, look for these 3 features before you buy:
- Continued growth: A big advantage of micro cap stocks over large cap stocks is that they can grow more efficiently. Although many micro-cap stocks have debt and negative earnings per share (EPS) values, a strong year-over-year growth record can mean the company is steadily approaching profitability.
- Trade on a major exchange: To trade on the New York Stock Exchange or NASDAQ, a company must meet basic financial documentation requirements. This makes it much more difficult to carry out acts of fraud or artificial price manipulation. You may want to avoid micro-cap stocks that only trade on OTC exchanges, as they can be very risky investments.
- High average daily volume: The average daily volume of a stock is the average number of stocks that change hands each day. If you are a day trader or looking to take advantage of rapid price movements, look for a micro-cap stock with higher daily trading volume. This ensures that you will be able to execute your positions when you think is best, and not just where there are buyers in the market.
Move your portfolio with microcaps
Investing in micro-cap stocks can be exciting – there’s nothing more exciting than the thought that you might have the next ‘big winner’ in your portfolio. It is also very important to remember that microcap stocks are not risk-free investments – they can fail at any time.
Be sure to selectively add micro-cap companies to a balanced portfolio of mostly large-cap stocks, total market index funds, and S&P 500 funds.