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Micro Cap

Definition

Micro Cap refers to a publicly traded company with a market capitalization typically between $50 million and $300 million. The market capitalization is calculated by multiplying the number of a company’s shares outstanding by its stock price per share. However, the thresholds for these categories can vary among different brokerage houses.

Phonetic

The phonetics of the keyword “Micro Cap” would be “Mahy-kroh Kap.”

Key Takeaways

  1. Higher Risk, Higher Potential Reward: Micro Cap Companies are typically smaller, unestablished businesses, making them riskier investments. Due to their size, they may face more challenges like limited resources and market share. However, they often provide higher potential for growth and returns.
  2. Less Regulation and Public Information: Micro-cap stocks often aren’t as regulated or have less publicly available information making them prone to fraud or manipulative trading practices. Lack of information could make it difficult for investors to make informed decisions.
  3. High Volatility: Micro Cap companies tend to be more volatile than larger companies. This can result in significant price swings, potentially leading to substantial gains or losses quickly. It also means that these stocks may be less liquid, making it harder to buy or sell shares without impacting the stock price.

Importance

Micro Cap refers to publicly traded companies with smaller market capitalizations, typically under $300 million. The importance of Micro Cap lies in the high growth potential they offer to investors. These smaller companies may offer significant returns if they grow and prosper, thus potentially resulting in a substantial rise in their stock prices. However, Micro Cap stocks also carry a high level of risk due to their size, relative obscurity, and the lack of information they provide to the public. Purchasing Micro Cap stocks is thus seen as a high-risk/high-reward investment strategy. Therefore, it’s important for investors to understand the concept of Micro Cap in order to strategically diversify their portfolios and maximize potential returns.

Explanation

Micro cap refers to publicly traded companies with a market capitalization typically between $50 million to $300 million. These companies are considered the smallest on the market, and their stocks are often referred to as “micro cap stocks”. The primary purpose of micro cap investing is the potential for significant capital appreciation. The smallest companies often have the greatest potential for growth, as compared to large, established entities.However, it’s also important to note that investing in micro cap companies can also involve substantial risks, as these firms often have limited resources, less competitive strengths, and can have higher failure rates than larger companies. Micro cap stocks are frequently used by investors willing to accept these risks in return for the potential of substantial returns. More often than not, they are used for long-term growth strategies, as their lower liquidity often doesn’t lend itself well to short-term trading. The low liquidity can also make these stocks more susceptible to price manipulations, but this is a risk that investors are often willing to take in their pursuit of high returns.

Examples

Micro Cap refers to companies with a relatively small market capitalization, typically ranging from $50 million to $300 million. These companies are considered more volatile and risky than larger cap companies, as they’re often newer or operate in emerging industries. Here are three real-world examples:1. Digital Turbine, Inc. (APPS): As of its early days, this company was considered a Micro Cap. It provides media and mobile communication solutions for businesses globally and had a small market capitalization. As of now, it has grown into a larger cap.2. Plug Power, Inc. (PLUG): This company is in the business of alternative energy and was once classified as a Micro Cap company due to its small market capitalization. It develops hydrogen fuel cell systems replacing conventional batteries in equipment and vehicles powered by electricity.3. MannKind Corporation (MNKD): A biopharmaceutical company focusing on the discovery, development and commercialization of therapeutic products. It’s recognized as a Micro Cap company due to its comparatively small market cap. Please note that the status of these companies may have upgraded due to business growth and market performance since the time of this writing.

Frequently Asked Questions(FAQ)

What does Micro Cap mean?

Micro Cap refers to a company with a market capitalization (market value of a public company’s outstanding shares) typically between $50 million to $300 million.

How is Micro Cap calculated?

The micro cap size is calculated by multiplying the company’s outstanding shares by the current market price of one share.

Why are Micro Cap companies considered risky?

Micro Cap companies are often young or situated in risky markets. This can lead to a lack of stability or predictability, making them a risky investment.

Can Micro Cap stocks become large cap stocks?

While it’s possible for a micro cap company to grow and turn into a large cap stock, such transformations are not common and usually take many years.

Where can I find information about Micro Cap companies?

Detailed information about Micro Cap companies can usually be found in financial news, finance websites, and sometimes on the company’s own website.

Who typically invests in Micro Cap companies?

Experienced investors who are willing to take a high risk for potential high rewards, such as venture capitalists, usually invest in Micro Cap companies.

Can I invest in Micro Cap through funds?

Yes, there are numerous Micro Cap mutual funds and ETFs that allow investors to gain exposure to a diversified portfolio of Micro Cap stocks.

How do Micro Cap stocks influence the economy?

Micro Cap companies can play a significant role in the economy because they have a great potential for growth and innovation. However, they may also contribute to financial volatility due to their inherent investment risks.

How often is the market cap of a company recalculated?

The market cap of a company can change daily as it is based on the current share price, which can fluctuate based on a variety of factors including business performance, market sentiment, and overall economic conditions.

: Are Micro Cap stocks liquid?

Generally, Micro Cap stocks have lower liquidity than larger cap stocks. This is because they often have fewer shares available to trade, leading to a wider spread between the bid and ask prices.

Related Finance Terms

  • Market Capitalization: This is the total dollar value of all outstanding shares of a company’s stock. Micro cap companies typically have a market capitalization of under $300 million.
  • Penny Stocks: These are typically small company stocks traded for less than $5 per share. Many micro cap stocks are considered penny stocks.
  • Liquidity: This generally refers to how quickly an investment can be sold without impacting its price. Micro cap stocks often have lower liquidity.
  • Risk/Reward Analysis: Micro cap stocks often present more risk due to their size, but can also offer higher potential returns.
  • Due Diligence: This term refers to the research a potential investor should do before buying a company’s stock. It’s particularly important when considering micro cap stocks, which may not be as thoroughly analysed or vetted as larger companies.

Sources for More Information

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