An Investment Guide to Micro Cap Stocks

Micro cap stocks are inexpensive stocks issued by small companies.  They represent the total value of a company’s stock.  Companies offering micro-cap stocks often have limited assets, and their stocks tend to be traded in low volumes.

Where are microcap stocks traded? The majority of micro-cap stocks are sold on the over-the-counter (OTC) market.  They are quoted on the OTC Bulletin Board (OTCBB) or the “Pink Sheets.”

The OTCBB comprises an electronic quotation system.  It displays quotes in real-time.  Brokers must subscribe to the system to look up data and enter quotes for securities listed.  The OTCBB is not associated with the Nasdaq Stock Market, and the majority of securities listed there are not listed on Nasdaq.

The “Pink Sheets,” so called because of the color of the paper on which quotes are listed, provide price quotes to those who trade in the OTC market.  The pink sheets can be used by brokers who wish to commit to purchasing and selling OTC securities.

How do micro-cap stocks differ from other types of stocks? Micro-cap stocks differ from other types of stocks in the amount of information available about the companies.  Information is often lacking, rendering them vulnerable to fraud schemes.

How much risk is associated with micro-cap stocks? Micro cap stocks are associated with a high degree of risk.  This is because the majority of micro-cap companies are new and hence lacking in assets and operations.  Micro-cap stocks trade in low volumes, meaning that any sized trade can significantly impact the stock price.

Who do micro-cap stock companies have to report to? All OTCBB companies are required to file regular financial reports either with the SEC or their banking or insurance regulators.  Companies that fail to provide timely reports are removed from the OTCBB. While company reports must be both truthful and complete, the SEC is unable to guarantee the accuracy of the information provided. Companies with assets less than $10 million are exempt from filing with the SEC.

How can fraudulent information be identified? The majority of the companies that are exempt from filing with the SEC are legitimate, but there is still fraudulent information out there Fraudsters spread false information through e-mail spam, internet bulletin boards, advertisements, and more.  To receive reliable information about companies before investment, it is advisable to investigate whether the company files with the SEC.  The state securities regulator and other government regulators, the secretary of state in which the company is incorporated, and commercial databases can also provide information on micro-cap companies.

 

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