Trading 101: Micro-cap Stocks

Micro-cap companies are those with a very small market capitalisation and tend to overlap with penny stocks. They have a lot of potential but also carry high risk. Read on to check out our top micro-cap stock picks. 

A micro-cap company can be defined as one publicly-traded market capitalisation between approximately $50 million and $300 million. They fit below small cap companies and above nano caps. 

As micro-caps have little capital to support them they tend to have greater volatility and therefore greater risk than larger-cap stocks. Their small shareholder base and lack of liquidity make them high risk. Although with higher risk, comes higher reward. For example, from 2008 to 2018, the Dow Jones Select Micro-Cap Index returned an annualized 11.6%, while the S&P 500 Index returned an annualized 10.37%.

Is the risk worth it?

As there is a higher risk associated with micro-cap stocks than typical stocks it is advised that you set a stop-loss order and fully understand the price you want to enter and exit the trade at. Micro-cap stocks are high-risk investments, so while it is possible to benefit from explosive gains there is also the potential for you to lose money. 

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Here are some reasons why micro-cap stocks are risky:

  • Private records mean the public have a lack of information to use to consider buying micro-cap stocks as these companies are not required to file financial statements with the SEC – who regulate markets. 
  • No minimum standards means micro-cap stocks can be listed on OTC exchanges no matter their performance. Needless to say this makes investing in this type of stock risky. 
  • Low liquidity is inherent to micro-cap stocks as they are not traded frequently. This opens up the opportunity of fraud as traders can manipulate prices.

Before you invest in micro-cap stocks, you will need to open an account with a broker to manage your investments. 

Choosing the best online stock broker can make the difference from an easy and exciting new experience to  constant frustration and disappointment. Accessing financial markets through online brokers is easy and inexpensive but there are so many out there tailored to a different sort of customer so choose the right broker that will optimise your user experience and profits. 

If you’re just starting out we recommend eToro and easyMarkets for their easy to use interfaces and fee – free trading.

Our pick of micro-cap stocks

Foxtons (FOXT) is a London based estate agent that should see a boost with the property market rebounding. The company is on a good track with performance improving throughout the pandemic. 

Abercrombie & Fitch Company (ANF) is a clothing retailer that has seen a 150% growth in stock price since March 2020. 

McBride (MCB) is a UK manufacturing firm that labels products. Shares have increased over 40% since 2019, this sort of growth is set to continue past the end the pandemic with their global expansion plans. 

Alumsac (ALU) is a sustainable building materials producer offering a generous 5.4% dividend yield. With a market capitalisation at £61.7m and analysts rating it as undervalued, you’d be a fool not to invest. 

Will you be investing in micro-cap stocks? Their greater annualised return is worth the higher risk for some. If you are ready to invest, we recommend eToro and easyMarkets for beginners.

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