What Are Micro Cap Stocks?

Micro cap stocks represent some of the smallest companies with publicly traded shares. These companies often have low stock prices, though in some cases they may have high growth potential. However, micro cap stocks can be risky because some of these companies don’t have to file extensive public financial reports—or any reports at all.

What are micro cap stocks?

Micro cap is a term for publicly traded companies with a market capitalization of $300 million or less. Market cap measures a company’s total value, a figure calculated by multiplying the number of shares outstanding by their current price. Micro cap companies are not the smallest companies; there’s an even smaller designation, nano cap, for companies with market values of less than $50 million. 

Investors group companies by market cap to help gauge their performance, and they often compare individual companies against an index of companies with similar market caps. This common practice is called benchmarking. 

A company’s exact value can change with market conditions and its financial performance. That means a company might occasionally move up or down the following rungs of the market-cap ladder: 

• Nano cap: under $50 million
• Micro cap: between $50 million and $300 million
• Small cap: between $300 million and $2 billion
• Medium cap: between $2 billion and $10 billion
• Large cap: between $10 billion and $200 billion
• Mega cap: $200 billion or more

Where to find micro cap stocks

Investors who are interested in micro cap stocks can find some of them on national securities exchanges such as Nasdaq and the New York Stock Exchange. Other micro cap stocks trade on alternative trading systems—often referred to as the over-the-counter, or OTC, market—instead of on a centralized exchange. A market maker, which is a person or firm that buys and sells securities, often uses an online service to publish what’s known as bid and ask price quotes. 

The various alternative trading systems have different eligibility requirements for quoting OTC securities. But generally, they have lower listing standards than national securities exchanges, which have extensive profitability, minimum share price, and financial disclosure rules. In contrast, companies listed on the OTC Pink marketplace—sometimes called the “pink sheets” because they were originally published on pink paper—don’t have to follow financial standards or reporting requirements.

Companies that don’t have more than 2,000 shareholders or more than $10 million in assets don’t have to file financial reports with the SEC, though they can voluntarily report to the agency. 

Investing in micro-cap stocks

Investors can purchase shares in an investment fund that buys micro-cap stocks. For instance, mutual funds, index funds, and exchange-traded funds (ETFs) may hold micro cap stocks or track a micro cap index. The Dow Jones Select Micro-Cap Index, for instance, follows a selection of about 165 U.S.-traded micro-cap stocks. 

Some investors take a more hands-on approach by selecting and buying individual stocks, although it may be difficult to research some companies. Investing in a fund that holds or tracks micro cap stocks can be a simpler approach and provides immediate exposure to multiple securities.

6 Examples of micro cap stocks

Here are some examples of three microcap stocks that performed well in 2022 and three that have recently lagged behind. (Note: All market caps and share performance are as of late September 2022.)

• Kimball International (KBAL).

  Kimball is a commercial furnishings company with a market cap of roughly $235 million. The company posted a 21% sales increase in the fiscal fourth quarter ended Aug. 31 and predicted revenue growth of 15% for fiscal 2023. 

• Build-A-Bear Workshop (BBW).

  With a market cap of about $192 million, Build-A-Bear Workshop sells stuffed teddy bears and other animals. In the first half of fiscal 2022 ended July 31, the retailer reported company-record revenue of $218.3 million, an increase of 17% from 2021.

• Accuray (ARAY).

  Accuray develops, manufactures, and sells radiotherapy systems for alternative cancer treatments. Its market value was about $188 million. In fiscal 2022 ended June 30, the company reported revenue of $429.9 million, an increase of 8.5% from fiscal 2021.

• Maiden Holdings Ltd (MHLD).

  Maiden is an insurance holding company with a market cap of about $178 million. For the three months ended June 30, 2022, the company posted revenue of $20.69 million, a 5.9% decline from the year-earlier period.

• AstroNova (ALOT). AstroNova, with a market cap of about $87 million, designs and develops data visualization solutions. In the six months ended July 30, 2022, its net income declined 87% to $1 million.
• 4D Molecular Therapeutics (FDMT).

  4D Molecular Therapeutics designs, develops, and sells gene therapeutic products. The company’s market cap was about $263 million, while its revenue for the quarter ended June 30, 2022, was down 98% from the same quarter a year ago.

Benefits of micro-cap stocks 

There are several potential advantages to investing in micro cap stocks, including:

• More variety.

  There are more micro cap stocks to choose from compared to large and mega cap stocks.

• Low prices.

  Micro cap stocks tend to be inexpensive. They may even be undervalued, which could be appealing to value investors

• Dividend payments.

  Some micro cap companies may pay dividends, which can provide steady income. Kimball International, for example, pays an annual dividend of $0.36 a share for a yield of about 5.6%.

• Typically U.S.-based.

  Many micro cap firms are headquartered in the U.S. and lack extensive overseas operations that many larger companies have, meaning that investors don’t have to worry about currency fluctuations. 

• High growth potential.

  Because micro cap companies often are new, they can generate rapid growth. Between 1926 and 2018, one study found, the compound annual growth rate of small company stocks was 11.8%, compared to 10% for large company stocks. 

Risks of micro-cap stocks  

Micro cap stocks do, however, have potential risks, which may include:

• Little transparency.

  Some micro cap companies don’t have to file financial statements with the Securities and Exchange Commission, as larger corporations are required to do. This can make it difficult for investors to learn about the company’s management, products, services, and finances.

• Potentially overpriced.

  If there’s little information available, the microcap stock price may be inflated.

• Fraud.

  The lack of publicly available information can make investors more vulnerable to corporate fraud. It’s also possible for scammers to spread false information about companies that don’t provide public information.

• Sales and operations.

  Because many microcap companies are new, they may plan to sell products and services that are still in development or untested in the market. Some of these companies may not have any sales or operations, the SEC says.

• Greater volatility.

  Micro cap stocks are often less liquid than the shares of larger companies, so trades of even a small number of shares can have an outsized impact on the stock price. This can expose investors to wide price swings. 

• No minimum listing standards.

  Companies listed on alternative trading systems generally don’t have to meet the standards of a national stock exchange. For instance, micro caps may not be required to have a minimum amount of assets, profits and shareholders.

The bottom line

Micro cap companies are businesses with market capitalizations of $300 million or less. Their stocks may offer high growth potential, but they may also have low liquidity that can contribute to volatility. Among the biggest drawbacks is the lack of public information because many micro cap companies don’t provide full financial reports to the SEC. 

Investors who are willing to handle the risk may decide to add micro cap stocks to their portfolio for diversification. It’s possible to gather information about these small companies by checking if the company files reports with the SEC.