Global Sports: a study of microcap stocks

Thursday, January 13, 2011

a study of microcap stocks

By Vivian Larson


Among the most important arsenals of an investor is information. Before investing his hard-earned cash on a company, an investor must know everything relevant information about it. However, some companies only have limited information available about them, which makes them more vulnerable to schemes and fraud. One of these is microcap stock companies. If you're planning to invest in these stocks, here are a few things you should know.

Technically, they refer to publicly traded companies which have a business value of US$100 million dollars or less. Though majority of the US stocks falls under this category, they only make up a very small fraction of the whole stock market value. This basically means that these companies are traded in very small amounts and in very minimal volumes.

Microcap stocks are typically traded in Over The Counter markets and there are two ways of doing this. First, the stocks are quoted in the OTC Bulletin Board, which is an e-quotation system that disseminates real-time sales, quotes, and volume information. The second method is through the Pink Sheets, which is essentially a list of price quotations for companies traded in the OTC market. You won't usually find them in NASDAQ and AIMEX because these are major exchanges that require a company to have a particular net amount before being traded. You would know if a company is already established if it belongs in either of the two major exchanges.

The main difference between these and other kinds of stock is the availability of reliable information. There is limited information available about these shares because they have nominal value and low interest from big investors. Stock analysts also rarely write and research them. For this reason, the trading capacities are very restricted. The lack of reliable information also makes these companies vulnerable to fraudulent schemes.

Another reason why they have rare appearances in primary stock exchanges is because they don't meet the minimal requirements. Companies that trade in NASDAQ and AIMEX have to have a certain number of stockholders and a certain net asset amount. Meanwhile, the Pink Sheets and the OTC Bulletin Board, where penny stocks are usually found, do not have any such requirements.

Another thing to consider is that microcaps are one of the most risky stocks to trade with. This is because these stocks are still new in the business so there's no track record available yet. Also, some are still under development and still needs to be tested.

Among all the stocks available, these could be considered among the riskiest to trade, however most lucrative if done right. Why? Their prices are unstable because they trade in small volumes and very low values. There would be a major impact on stock prices if you trade them with other kinds of stocks. You should carefully think about these risks before you decided to trade this criteria of shares.

If you're set to go in this level of trading, you should look for more resources about the field, because this article only covered the basics. Remember, if you have enough knowledge about microcap stocks, you would be able to make good decisions and avoid being on the losing end.




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