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In business and investing, term microcap stock (also micro-cap) refers to the stock of
public companies A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (list ...
in the United States which have a
market capitalization Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by t ...
of roughly $50 million to $300 million. The shares of companies with a market capitalization of less than $50 million are typically referred to as nano-cap stocks. Many micro-cap and nano-cap stocks are traded
over-the-counter Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid prescr ...
with their prices quoted on the
OTCBB The OTC (Over-The-Counter) Bulletin Board or OTCBB was a United States quotation medium operated by the Financial Industry Regulatory Authority (FINRA) for its subscribing members. FINRA closed the OTCBB on November 8, 2021. The board was used for ...
, OTC Link LLC, or the Pink Sheets. The larger, more established micro-caps are listed on the
NASDAQ Capital Market The Nasdaq Stock Market () (National Association of Securities Dealers Automated Quotations Stock Market) is an American stock exchange based in New York City. It is the most active stock trading venue in the US by volume, and ranked second ...
or
American Stock Exchange NYSE American, formerly known as the American Stock Exchange (AMEX), and more recently as NYSE MKT, is an American stock exchange situated in New York City. AMEX was previously a mutual organization, owned by its members. Until 1953, it was known ...
(AMEX). This is true in the US, but by contrast—in
Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...
, for example—nano-cap companies are commonly listed on the
Australian Securities Exchange Australian Securities Exchange Ltd or ASX, is an Australian public company that operates Australia's primary securities exchange, the Australian Securities Exchange (sometimes referred to outside of Australia as, or confused within Australia as ...
(ASX). Microcap stocks are in many ways different from other stocks since they are from companies with a small market capitalization and are usually traded on stock exchanges that do not require minimum standards, such as a minimum amount of net assets or a minimum number of stock holders. In addition, these micro cap stock companies often have fewer resources to make their information available to the public. These micro cap stocks are less likely to be published and talked about by stockbrokers compared to larger public companies. Often, microcap stock companies will specialize in innovative products or services that may be unknown to the general public. In Australia, many of them are junior mining explorers. Micro-cap and especially nano-cap stocks can sometimes experience volatility. Some of these companies fail to execute their business plans and go out of business.
Fraud In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. Fraud can violate civil law (e.g., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover monetary compens ...
and
market manipulation In economics and finance, market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearances ...
are not uncommon and the transaction costs in trading can be quite high. Pricing is more likely to be inefficient, since fewer institutional investors and analysts operate in this space, due to the relatively small dollar amounts involved and the lack of
liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity, the ease with which an asset can be sold * Accounting liquidity, the ability to meet cash obligations when due * Liqui ...
—in other words, how many trades are made per day. Investors and finance experts have proposed microcaps can be good investments. David Maley of
Ariel Investments Ariel Investments is an investment company located in Chicago, Illinois. It specializes in small and mid-capitalized stocks based in the United States. History Ariel was founded in 1983 by John W. Rogers, Jr., who is chairman and Co-CEO of the ...
argues that ample evidence indicates holding a portion of a portfolio in micro-cap stocks can offer advantages. Micro-caps as a group tend to out-perform stocks from larger companies over time, Daley notes, and micro-caps are not closely correlated with larger company stocks or
index funds An index fund (also index tracker) is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that the fund can a specified basket of underlying investments.Reasonable Investor(s), Boston University Law Review, avail ...
and thus potentially offset broader market volatility. Furthermore, micro-caps being relatively neglected by analysts offers more potential opportunities for value investors. Similarly, professor Jeremy J. Siegel of
Wharton School of Business The Wharton School of the University of Pennsylvania ( ; also known as Wharton Business School, the Wharton School, Penn Wharton, and Wharton) is the business school of the University of Pennsylvania, a private Ivy League research university in ...
notes in his book ''
Stocks for the Long Run ''Stocks for the Long Run'' is a book on investing by Jeremy Siegel. Its first edition was released in 1994. Its fifth edition was released on January 7, 2014. According to Pablo Galarza of ''Money'', "His 1994 book ''Stocks for the Long Run'' se ...
'' how a review of American stock data from 1926 to 1996 found that the smallest quintile of stocks by capitalization (including micro-caps) outperformed the largest quintile by an average of almost 4% per year. But this over-performance was not consistent, with multi-year stretches of time when smaller company stocks under-performed relative to larger company stock.Siegel, Jeremy J. (1994, 1998). Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies. Second Edition, Revised and Expanded. McGraw-Hill, INSB: 0-07-058043-X, p. 93


See also

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Market manipulation In economics and finance, market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearances ...
*
Microcap stock fraud In business and investing, term microcap stock (also micro-cap) refers to the stock of public companies in the United States which have a market capitalization of roughly $50 million to $300 million. The shares of companies with a market capitali ...
*
Penny stock Penny stocks are common shares of small public companies that trade for less than one dollar per share. The U.S. Securities and Exchange Commission (SEC) uses the term "Penny stock" to refer to a security, a financial instrument which represents a ...


References

Stock market {{business-stub