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Introduction to Microcap Stocks

Before you consider investing in microcap stocks, gather as much information as possible. This article will try to get you familiar with at least the basics of microcap stocks.

What Is a Microcap Stock?

Microcap stocks (or also "micro-cap") are issued by companies with low or "micro" capitalizations (roughly US$250 million or less). Such companies usually have limited assets and the stocks are usually low priced and trade in low volumes.

The majority of the U.S. stocks fall into the microcap stocks category. Many of them trade in over the counter (OTC) exchanges and their prices are quoted on OTC systems, such as the OTC Bulletin Board (OTCBB) or the Pink Sheets.

The more established (larger) microcap stocks can be listed on NASDAQ Small Cap or the American Stock Exchange (AMEX).

Microcap Stocks vs. Other Stocks

One of the problems of investing in microcap stocks compared to the other stocks is that it is harder to find reliable, publicly available information about the microcap company.

Larger companies send financial reports to the SEC and since they can be provided for free from the SEC's website investors can easily find information about the company's management, finances, products, and services. Articles and researches by professional stock analysts are also easier to find when it comes to larger public companies.

However this is not the case with microcap stocks. Real facts and information about microcap companies can be very difficult to find. Thus, it is even easier for fraudsters to spread false facts about microcap companies and cause losses for unsuspecting investors.

To add to this, there are no minimum listing standards for microcap stocks. Companies traded on major exchanges and the Nasdaq Stock Market are required to meet certain standards such as minimum amounts of net assets or minimum numbers of shareholders. Once again, this is not the case with companies on the OTCBB or the Pink Sheets.

Risks of Investing in Microcap Stocks

All investments involve certain amount of risk. However, microcap stock can be categorized among the most risky investments. Here is why:

  • Many microcap companies are usually new and don't have proven record.
  • Typically they also don't have assets or operations.
  • Some of the microcap companies offer products and services that are still in the process of development or need yet to be tested in the market.
  • Generally, microcap stocks involve low volumes of trades which means that even a small size of trade may have a large impact on the price of the stock.

To conclude, arm yourself with a lot of solid facts and information before you invest in a microcap company - this simple step can make the difference between a profit and a loss.

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