Micro-Cap - Definition, Vs Small Cap, How To Invest (2024)

Micro-Cap Stocks Definition

Micro-cap stocks are those categories of stocks whose market capitalization is generally between $100 million to $250 million. Such stocks have a market capitalization greater when compared to nano-cap companies but are usually lesser than small-cap, mid-cap, and large-cap companies.

The return generated by micro-cap stocks is tremendous and can make a person amass a lot of wealth within a period. They pay more importance to long term growth. They operate very efficiently and are very focused on growing their business. Thus, even for investors, micro-caps play a boon if appropriately chosen.

• Micro-cap stocks have a market capitalization ranging from $100 million to $250 million. They have a higher market capitalization than nano-cap companies but a lower one compared to small-cap, mid-cap, and large-cap companies.
• Micro-cap stocks can provide significant returns and help individuals accumulate wealth over time. They prioritize long-term growth and operate efficiently, making them a great investment choice.
• Micro-cap stocks are risky due to their significant value changes. Quick profits are possible, but so are substantial losses. These stocks require more information to make informed decisions and have low liquidity, making caution essential when investing.

Micro-Cap Stocks Explained

Micro-capfund stocks generally possess higher volatility, which means they have more risk. Thus, these stocks are usually considered to be riskier thanlarge-cap companies. In addition, these companies are typically preferred for intra-day trading due to the volatility feature, which makes rapid price changes to the stock. Due to these massive fluctuations, they are also considered to be riskier. One can easily make quick money utilizing volatility. But, in the same way, one may lose a lot of money. One disadvantage of these stocks is the minimal information available for these categories of stocks. Thus, one must be careful to avoid bogus stocks and other pitfalls. The other disadvantage of micro-capcompanies is that theliquidityattached to the stock is very limited because very few analysts provide coverage for these stocks. Institutional buyers' absence in these stocks adds to the liquidity problem.

Example

Peoples Financial Services Corp. is an example of a micro-capcompanies stock traded in NASDAQ. It was founded in 1905 and is headquartered in Pennsylvania, USA. Themarket capitalizationof 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 stock is $38.71. The total volume of shares traded on the market is approximately $7 million.

Why Does Micro-Cap Matter?

The following reasons may guide us on why micro-capfund must also co-exist along with other small, mid, and large caps: -

• Micro-capholdings has unlimited growth potential if proper stocks are chosen after some self-conducted research. Some well-known companies started as micro-cap and grew from that level to become large caps today. Therefore, finding one such value-added stock can be a blessing for every investor.
• Micro-capholdings have long-term sustainability attached to them. It attracts less attention to Wall Street because, unlike large-cap, they do not have to make immediate sacrifices to keep theirshareholdershappy by putting their long-term goals to stake. Therefore, these companies are more concerned and worried about their long-term goals 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. Thus, they are also easy acquisition targets on account of this attribute. 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 is to bring it under their shed. They have great potential for generating hefty returns.

How To Invest?

A few features regarding how to buy micro cap stocks are as follows: -

• Little public information is available for these stocks as few analysts will provide coverage. Thus, reliable information for the same is not readily available. In addition, many micro-cap companies do not file their report with the regulators making it more difficult for investors to accumulate data.
• One must keep in mind that micro-caps are generally high-risk stocks. Thus, the potential to earn is enormous. But unfortunately, the same concept goes for the potential to lose. In addition, they are also relatable to low trading volumes; any large sell signal may directly impact the stock price.
• Micro-caps are traded over the counter or on theOTC marketbecause few stocks lack liquidity and listing requirements. Thus, we may find many such stocks on an OTC basis and not listed on any exchange.
• A value-generating stock can generate huge returns for investors if chosen properly. Thus, micro-cap stocks have a vast potential to create a return.

Thus, the above points clearly explain how to buy micro cap stocks.

Micro-Cap Stocks Vs Small Cap Stocks

• Micro-caps are smaller firm compared to small-caps in terms of business operation.
• Micro-caps have a $100 million to $250 million market capitalization whereas small cap has a market capitalization of above $250 million.
• The risk level of the former is more than the latter because they are comparatively new in the market.
• Compared to small caps the track record and performance history of micro-caps is less.

Frequently Asked Questions (FAQs)

Recommended Articles

This article is a guide to Micro-Cap and its definition. We explain its differences with small cap, how to invest, example and why does it matter. You can learn more about it from the following articles: -

• Cyclical Stocks
• Small Cap Stocks
• Mid-Cap Stocks
• Large Cap vs. Small Cap Stocks