What is a 'Micro Cap'
A micro cap is a publicly traded company in the United States that has a market capitalization between approximately $50 million and $300 million. Micro-cap companies have greater market capitalization than nano caps, and less than small-, mid-, large- and mega-cap corporations. Companies with larger market capitalization do not automatically have stock prices that are higher than those companies with smaller market capitalizations.
BREAKING DOWN 'Micro Cap'Companies with less than $50 million in market capitalization are frequently referred to as nano caps. Both nano caps and micro caps are known for their volatility, and as such, tend to be considered more risky than companies with larger market capitalization. Market capitalization measures the market value of a company's outstanding shares, calculated by multiplying the stock's price by the total number of shares outstanding.
Being that micro-cap stocks have market cap between $50 million and $300 million, investors must be ready for greater volatility and risk compared to the large-cap stocks in the S&P 500. However, during periods of bullish strength, micro caps tend to outperform their larger counterparts. For instance, from July 2006 to July 2016, the Dow Jones Select Micro-Cap Index returned 65.78%, while the S&P 500 Index returned 59%.
U.S. Micro Caps More Reliant on Health of Domestic Economy
While there may be some U.S. micro-cap companies that rely on a heavy portion of their revenue coming from sources outside the United States, the vast majority conducts all or most of their business within the United States. This is important because domestic companies that do not have operations overseas do not need to worry about currency fluctuations and the potential impact of conversion risks on earnings.
Less Liquidity and Readily Available Information Than Larger Companies
Another consideration is the fact that there are vastly more micro-cap stocks on the market than there are large- and giant-cap stocks. Overall, investors may not see the same level of readily available information as with larger stocks such as Apple Inc. As a result, the limited information and vast quantity of micro-cap stocks on the market makes research extremely important to avoid fraudulent stocks and other potential pitfalls.
Micro caps also have another drawback in that investors need to pay attention to liquidity when conducting research on smaller companies. Lack of regular analyst coverage and institutional buying are additional reasons why there is less liquidity in the micro-cap markets than in larger-cap stocks.
Overall, micro-cap stocks represent a high-risk, high-reward opportunity for investors who are willing to do more research on the company involved, to determine whether it is worth the investment. This could include contacting the company directly to get the answers to any questions.