Microcap Stocks

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The term microcap or micro-cap (also see penny stocks) is used for publicly traded companies having a market capitalization of roughly $250 million or less. The vast majority of U.S. stocks fall into this category, but they make up only a small fraction of the total stock market value. Most are traded on over the counter exchanges, and their prices are quoted on the OTC Bulletin Board (OTCBB) or the Pink Sheets. Larger, more established microcaps are often listed on the NASDAQ Small Cap or American Stock Exchange (AMEX). Other common exchanges for U.S. microcaps include the Alternative Investment Market (AIM) in London, the Toronto Venture Exchange, and the Frankfurt and Berlin stock exchanges. The AIM has become a popular alternative to listing on U.S. exchanges since the Sarbanes-Oxley Act of 2002 greatly increased the accounting and legal costs of a U.S. stock listing, which are disproportionately high for small companies.

Microcap stocks are notorious for their volatility, and a high percentage of these companies fail to execute their business plans and go out of business. Fraud and market manipulation are not uncommon, and the transactions costs in trading can be quite high. However, many investors believe that these risks are outweighed by the large percentage returns that come with success. 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.

The microcap and smallcap sectors have outperformed larger stocks in the years since 2000, and new indexes have been created to track the performance of microcaps as an asset class. These include the Russell Microcap Index, the Dow Jones Select Micro-cap Indexes, and the Dow Jones Wilshire U.S. Micro-Cap Index.