Home Insights What is a Microcap?

What is a Microcap?

by Alan Daniel
, What is a Microcap?

A microcap, or micro-cap, is a company that falls within the micro capitalization category. The company will be one that meets certain requirements, and is publicly traded. The corporation would have its shares priced or valued by the market in that the total capitalization would fall under $300 million with a minimum of $50 million market capitalization. This means that if an investor where to multiply the total shares time the current market value it would fall within the above specified range.

Microcaps have lesser market capitalization than small caps and large cap stocks.

Remember that a microcap stock might have a share price that is at $1,200. It can still fall into the microcap segment due to the total shares present in the market.

There are about 1300 microcap shares at the time of this writing.

Why Investors Choose Microcaps

Simply put, investors and traders want to beat the average annual performance of the market.

They may subscribe to the small firm effect theory. The small firm effect theory states that the common stocks of small firms with equivalent risk perform better than large ones. In essence, they were found to generate higher returns.

Investors might see a significant upside because of the relative size of each company found in the microcap range.

Microcap companies are “micro” and many believe that these can grow and provide significant returns over time. These shares usually experience substantial volatility and may some go through price manipulation. This is both a good and a bad aspect as it can contribute to significant gains and massive losses depending on your entry and exit point.

What to Watch When Investing in Microcaps

First, look at the technicals.

Investors should select stocks that meet certain price and volume characteristics. Stocks that have minimal trading or volume can have an adverse impact on an investors portfolio. Experts generally recommend investors to invest in stocks that have an average daily trading volume of 350,000 or more. The average trading volume for microcaps may be substantially less. Investors would have to adjust the average daily trading volume to what may be relevant in microcap country.

Pay attention to dollar volumes in trades, medium to high dollar volume trading may be a vital factor for stability in investing in microcaps.

Remember that trading liquidity is critical for investors who are regularly active within the markets.

Second, look at the fundamentals.

Why does the company matter? What is it doing that is fascinating or compelling? Is it a high growth company or a value company focused on slowly increasing current revenues? What sort of rights does it have to revenues? Which type of people are part of the management team? What is their total experience within the field?

Investors need to understand the stability of the company and the value of its future cash flows.

Sustainability matters in all cap markets.

Want Microcap Exposure Without Individual Stock Picking?

Investors can have exposure to microcaps by placing value in index funds such as the Dow Jones Select Micro-Cap Index. Microcaps may help to provide significant performance over time beating larger indices.

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