Micro-Cap Stocks Definition

Explanation

Micro-cap stocks generally possess higher volatility, which means they have more risk. 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. 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-cap is that the liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more attached 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.

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Example of Micro-Cap Stock

Peoples Financial Services Corp. is an example of a micro-cap stock traded in NASDAQ. It 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 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-caps must also co-exist along with other small, mid, and large caps: –

  • Micro-cap 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. The return generated by micro-cap stocks is tremendous and can make a person amass a lot of wealth within a period. Therefore, finding one such value-added stock can be a blessing for every investor.Micro-caps 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 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. 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. They operate very efficiently and are very focused on growing their business. 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. Thus, even for investors, micro-caps play a boon if appropriately chosen. They have great potential for generating hefty returns.

Investing in Micro-Cap

A few features of investing in micro-cap stock 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 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 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.

This article is a guide to Micro-Cap and its definition. Here, we discuss how micro-cap work, examples, micro-cap investing, and its features. You can learn more about it from the following articles: –

  • Cyclical StocksSmall Cap StocksMid-Cap StocksLarge Cap vs. Small Cap Stocks