Micro-cap or microcap generally is used for the companies or enterprises that have a low market cap (capitalization). That number can range anywhere from 50 million to 300 million dollars. The formula to determine the market cap is:
Share Price (outstanding changes included) X Daily Changes = Market Cap.
Definition
Microcap stocks are mostly the newly listed companies that are bound with the least regulations. They can also be smaller companies that have the potential to become large caps in the future.
Stock categorization
While there is no strict rule as to how companies can be categorized based upon market cap, thanks to the dynamic nature of the market participants, a non-official stocks classification is shown below.
Large-cap - market cap above 10 billion dollars.
Mid-cap - ranges between 2-10 billion dollars.
Small-cap - ranges between 300 million to 2 billion dollars.
Microcap - ranges between 50-300 million dollars.
Nano-cap - less than 50 million dollars.
Microcap stocks features
Limited or Lack of Public Information
The highlighting difference between microcap stocks and the stocks placed above that in the market cap ranking is the accuracy in the public information about the enterprise or company. The large market cap holding companies file their reports adhering to a regulatory body. That means you can access information about the company with the click of a few buttons. In addition to that, large caps are researched and written about by numerous financial analysts/experts, allowing traders and investors to make informed investment decisions on these stocks.
On the contrary, microcap companies are less transparent with their company information. Many of the small market cap holding companies remain hesitant to file reports with an accredited regulator. This makes it difficult for the investors to get information and insights about the company.
Come With Higher Levels of Risk
Investing in any kind of stock comes with some amount of risk; none can deny that. Microcaps carry a higher level of risk when compared to large caps. The trading volume can remain low, which can call for extensive market manipulations. These companies may also exist to scam naive investors and traders.
Do Not Carry a Minimum Listing Standard
A company that wants to get itself listed on the exchange has to fulfill minimum listing criteria which are set by that particular exchange. Microcaps can bypass this, barring a few exceptional situations.
Microcap Stocks are Traded OTC (Over-The-Counter)
There is low liquidity on microcaps, and the listing requirements of large caps are also absent. That is why, you will find many of these stocks being traded in the OTC or over-the-counter market. OTC marketplaces permit trading and investing in stocks directly in between the broker and the dealer, without requiring an exchange.
Rewards are Huge With Microcap Stocks
As we mentioned earlier that microcaps carry higher levels of risk than large ones; this indicates the possibility of higher rewards in return. Investors and traders must carry out full research and evaluate the position of the company. If they find potential in the business model, they can take the risk. Who knows, it can become a multi-bagger and give tremendous returns!