Some public companies are so small, they’re not even on investors’ radar. That is, until there’s major price movement and the stock gains significantly over a short stretch of time. The reason so many investors miss out on these big-time wins is because they’re not looking at micro caps: stocks with a market cap between $50 million and $300 million.

Why aren’t investors focused on micro caps? Simply put: they’re volatile and unproven. For every small company that doubles in size, two more lose half their value. There’s a lot of volatility in the smaller corners of the market, and many investors just don’t have the stomach for the ups and downs. Coupled with the risk of penny stocks and the sometimes-low liquidity, they become a tricky investment play for any investor. 

Here’s a look at micro cap companies: what they are, their pros and cons, and how they behave within the market as the smallest public entities. 

What is Market Capitalization?

To understand micro cap companies, investors need to understand market capitalization. Market cap is the value of a company’s outstanding shares. It’s calculated by multiplying the current share price against the total number of shares. Micro cap companies are those whose total outstanding share value is between $50 million and $300 million.

For example, consider Koss Corporation (NASDAQ: KOSS). In July 2021, the company’s share price was roughly $21 with an average of ~ 8.67 million outstanding shares, for a market cap of roughly ~$182 million. This positions the company firmly in micro cap territory. 

Companies’ market capitalizations change with the ebb and flow of its share price. A stock might breach $300 million in value, then fall below that threshold again the following week. Remember that market capitalization thresholds aren’t hard and fast—rather, they’re good guidelines for evaluating companies based on size. 

Examples of Micro Cap Companies

There aren’t too many well-known, widely-regarded micro cap companies. Why? Because this group represents companies that either haven’t made it into the public eye yet or worse, have fallen out of it. That said, there are a few familiar micros that investors will know by name, simply because of their prominence in certain industries or the brand attached to them. Some of the most recognizable micro cap companies include:

• Koss (NASDAQ: KOSS), $154.7 million
• Comstock Mining (NYSE: LODE), $152.1 million
• Moxian (NASDAQ: MOXC), $138.1 million
• Support.com, Inc. (NASDAQ: SPRT), $286 million
• Surface Oncology Inc. (NASDAQ: SURF), $270 million

There are roughly 1,600 micro cap stocks on the market today. This number ebbs and flows according to the performance of small caps, which may trend above or below the threshold. 

Micro Cap vs. Penny Stock Companies

Micro cap companies often get lumped in with penny stocks, which carry a negative connotation. While there’s significant overlap in many cases, it’s not fair to call all micro cap stocks penny stocks. 

A penny stock is typically one that trades for below $5. However, an up-and-coming micro stock may only have a market cap of $120 million, with 40,000,000 shares outstanding. Its $3 stock price might look like a penny stock, but if it has strong growth and ample opportunity, it could quickly find itself in small cap territory on an upward trajectory. Penny stock today; small cap darling tomorrow!

The Benefits of Investing in Micro Caps

Micro cap stocks offer tremendous upside. Investors with the ability to identify strong potential and high upside in a micros could find themselves holding a multi-bagger stock. Here’s a look at some of the other benefits:

• Low market cap usually means lower share price, which is a lower barrier to entry for investors. It’s easier to buy more shares and benefit from price appreciation. 
• Because investors tend to overlook them, many are either adequately valued or under-valued. There’s a major upside in recognizing price disparities.
• Institutional investors typically shy away from small companies, making them more of a haven for retail investors. As a result, there’s more room for investors to set the price.

It’s easy to envision the “rocket to the moon” when dealing with micro cap stocks. And while they certainly have a long runway in front of them, they’re not without drawbacks. 

The Downfall of Micro Cap Investments

Volatility is the number one reason many investors avoid micro caps. Between pump-and-dump activity and less-than-stellar financial reporting from small companies, risk can rise through the roof. Here’s a look at some of the other concerns:

• Low liquidity often plagues small companies and their stocks. It’s difficult to see price appreciation if everyone holds their position. 
• General market volatility tends to be disruptive for small companies. A few points up or down can really skew the stock price and the market cap of the company.
• Lack of institutional investment means there’s nothing buoying the price. If a few stakeholders decide to sell out of their investment, it could disrupt the price massively.

If you’re willing to stomach the risk, there’s plenty of upside in micro cap stocks. That is, of course, if the company itself is capable of pushing past its current limits, in pursuit of small cap status. 

Micro Caps Present Very High Risk/Reward

By nature, micro cap investments present equity investors with a high-risk, high-reward scenario. These are companies that may struggle to gain momentum and suffer mightily in the face of adversity; however, their low barrier to entry and high upside can reward patient investors richly. Be warned: micro caps are often subject to manipulation via penny pump-and-dump schemes! It’s important to approach these investments like any other: with a review of the balance sheet first. While a micro won’t become a mega anytime soon, it can return mega ROI if played right.

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