What to know about Micro-Cap Stocks

Many people have difficulty trading when it comes to micro-cap stocks. There are different definitions for these stocks, but a common opinion is that they are for any corporation with a market capitalization of under $250 million. One of the main attractions for these stocks is that there is the potential to make much larger gains than for traditional blue-chip stocks. However, there are potential risks associated with this type of trading and they need to be minimized. Hopefully, this article will make clear what you need to know and be aware of if you intend to trade in these stocks.

The market capitalization of a company is defined as its outstanding stocks multiplied by the share price of the stock. Micro-cap stocks can be defined differently with some saying they range from $10 to $100 million for a capitalization, but anything under $250 million is generally a safe definition. Often the price per stock can be less than a dollar, in which case they are known as penny stocks. Stocks of the same value often seem to have similar attributes in how they behave in the marketplace so analysts and investors like to place labels on stocks with certain market capitalization values.

One of the most common reasons for this type of investment is that it is possible to make much larger gains, and in much shorter time periods, than with larger cap stocks. The price can sometimes fluctuate wildly in just one day for some stocks. Another reason to buy these stocks is that because the price is lower, it is possible to buy much more of stock when you have little to spend. Therefore the potential to make more money with your investment is higher, but you have to be aware of the similar potential for big losses.

There is less regulation for micro-cap stocks, which can lead to greater volatility and in some cases even fraudulent activity. You have to be much more diligent about your research into the purchases you make. Also, having a stop loss order in place where you sell automatically once the price of a stock reaches a certain value is usually essential. With this approach you can minimize your losses on these stocks, which usually happens with the majority of investments, and then capitalize on those stocks that do increase in value. These micro-cap stocks have the potential to turn into major winners as long as you are aware of the risks and take steps to minimize them.

 

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