Explanation of Microcap Stocks

Microcap stocks are companies that are considered to be very small and are not generally traded on the New York Stock Exchange. Investing in this type of stock can provide individuals with a number of benefits. At the same time, there are some potential drawbacks to be aware of as well. Here are a few things to consider about microcap stocks.

Microcap Stocks

Microcap stocks are stocks that are issued by companies with small market capitalization and a small amount of assets. In fact, most microcap companies have market capitalization of somewhere between $50 million and $300 million. This is much smaller than the large cap companies that are included in the S&P 500 Index. Many investors are surprised to find that there are several well-known companies that fit into this category of businesses. There are definitely some good businesses to invest in in this category of stocks.

Potential

One of the primary advantages of investing in microcap stocks is that you can take advantage of some massive potential. Every company that is large was once small at some point. If you chose the right company, you could potentially make an unbelievable amount of return on your investment. Imagine if you had invested in Wal-Mart stock when it was still a microcap company. Today, your stock would be worth a substantial amount of money. The growth potential of microcap stocks is what attracts most investors to this category of businesses.

When a company gets too big, it is much more difficult for it to continue to grow. Companies that are extremely large have a hard time adapting to the market. When you invest in microcap companies, they will be able to adapt to changes in the market quickly, and be more profitable. 

Risk

Even though this category of businesses represents a great deal of potential, there is also great risk associated with it. For every company that rises from the ranks of microcap company to large cap company, there are hundreds that fail miserably. The odds of choosing the right company out of thousands of available choices are fairly low. This means that you could lose your entire investment if you choose the wrong company.

Lack of Information

Another potential problem with investing in microcap stocks is that you will not have much information to use. Since these companies are still relatively small, there is not a great deal of media coverage on them. Stock analysts tend to analyze the stocks that are well-publicized and that everyone knows about. With this category of businesses, you will most likely have a hard time finding enough information to make an educated decision about the company.

In many cases, this leads individuals to make rash decisions on whether to invest in a microcap company. In most cases, you would be better off leaving a company in this category alone instead of investing blindly.

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