Definition
Micro-Cap refers to a company with a market capitalization, typically, below $300 million. These companies are smaller than small-cap companies and are among the smallest publicly-traded firms. Due to their size, they may present a higher risk to investors, but could also offer high return potentials.
Key Takeaways
- Micro-Cap refers to small companies that have a market capitalization ranging from $50 million to $300 million. The market cap is calculated by multiplying the company’s outstanding shares by the current market price of one share.
- These types of companies, due to their small size, often lack the stability and resources of larger, more established companies and can therefore come with a higher risk. They may not have a proven track record or diversified product portfolio.
- Despite the higher risk, Micro-Cap stocks have the potential for significant growth and can offer strong returns if the business becomes successful, making them attractive investment options for aggressive, risk-tolerant investors. However, they may also be subject to increased volatility and less liquidity.
Importance
Micro-Cap is an important finance term because it refers to the market capitalization value of small publicly-traded companies.
This designation helps investors to identify smaller firms with potentially high growth prospects.
Though micro-cap stocks are considered riskier because they have less liquidity, less informational transparency, and higher vulnerability to market volatility, they can provide substantial returns if they eventually grow into larger cap companies.
Therefore, understanding the term ‘Micro-Cap’ and the associated risks and rewards is crucial for investors to properly diversify their portfolio and potentially enhance asset growth.
Explanation
Micro-cap refers to small public companies with market capitalization typically below 300 million dollars. They are a class of shares in the equities market that generally includes newer or smaller companies which are considered high-risk and high-reward investment opportunities.
The term “Micro-Cap” stands in contrast to larger-cap companies, such as large-cap or mega-cap, that have well-established track records and typically a large market footprint. From an investment purpose perspective, investing in micro-cap stocks can serve various strategic needs.
For aggressive investors, micro-caps provide the chance of outsized returns, especially during periods of robust economic growth. Given their small size, these firms have room to grow materially larger over time, which could lead to significant share price appreciation.
Moreover, they might also be potential targets for acquisitions by larger companies, often resulting in a premium being paid for the shares. However, it is crucial to note that their relative lack of liquidity, lower levels of business stability, and higher potential for manipulation present a higher risk profile compared to larger companies.
Examples of Micro-Cap
Micro-Cap refers to companies with a market capitalization between roughly $50 million and $300 million. Such companies may have significant growth potential, but they also frequently come with higher risk. Here are three real-world examples:
**Digital Turbine, Inc. (APPS)**: This was once a micro-cap company valued at just a few hundred million dollars. It is a software company specializing in mobile communications and advertising. The company has grown significantly in the past few years and has now outgrown the micro-cap space.
**Fulgent Genetics (FLGT)**: Known for their genetic testing solutions, the company started in the micro-cap range, gaining attention due to its supportive role in handling COVID-19 genetic testing.
**Zix Corporation (ZIXI)**: An email security company specializing in providing services for threat protection, archiving, compliance, and secure communications. Positioned in the IT space, Zix Corp started as a micro-cap company.Remember, while these companies are currently not in the micro-cap range, as their market cap has increased, they all started within the specific range. This emphasizes that micro-cap stocks do hold potential for noteworthy growth but come with a high level of risk which should be carefully considered.
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FAQs on Micro-Cap
What is Micro-Cap?
A Micro-Cap is a public traded company in the United States that has a market capitalization between about $50 million to $300 million. The market capitalization is derived by multiplying the company’s stock’s current market price by the number of outstanding shares.
Are Micro-Cap stocks safe to invest in?
Every form of investment has a certain level of risk associated with it, and Micro-caps are no different. Due to their relatively lower market capitalization, these stocks can be volatile and may be subject to limited liquidity, lack of financial reporting, and higher potential for fraud. Therefore, investors should conduct thorough research and possibly seek advice from financial advisors before investing in these stocks.
What are the benefits of investing in Micro-Cap stocks?
One of the potential benefits of investing in Micro-Cap stocks is the potential for high returns. As these companies are typically in the early stage of their growth lifecycle, there could be a significant upside potential if the companies eventually grow and succeed. However, this possibility also carries a significant risk of capital loss, so investments should be made wisely.
How to identify solid Micro-Cap companies?
When evaluating Micro-Cap stocks, investors should look at the company’s financial health, growth prospects, competitive position, the experience and quality of the leadership team, among other factors. It can also be helpful to research on what industry analysts and other market participants are saying about the company.
Related Entrepreneurship Terms
- Penny Stocks: These are small company stocks officially trading for less than $1, but often characteristic of micro-cap companies.
- Market Capitalization: It refers to the value of a company calculated by multiplying the stock’s price by its total number of outstanding shares.
- Over-the-Counter (OTC) Markets: Where most micro-cap stocks are often traded due to their absence from the large exchanges.
- Securities and Exchange Commission (SEC): Micro-cap companies are typically regulated by this U.S. governmental body.
- Risk and Return: Micro-cap stocks usually exhibit high potential returns but come with a higher risk than large and mid-cap companies.
Sources for More Information
Sure, here are four reliable sources where you can find information about the finance term “Micro-Cap”:
- Investopedia: A comprehensive source of financial information, it has thousands of financial terms explained, including “Micro-Cap”.
- Bloomberg: An internationally recognized news agency and financial information provider. They provide information on a range of markets, including the micro-cap sector.
- CNBC: An American pay television business news channel owned by NBCUniversal News Group, it reports on business and provides economic news.
- The Motley Fool: This site offers a wide range of financial advice, from personal finance to investing in stocks, including information about micro-cap companies.
