What is a Microcap Stock?

A microcap (or micro-cap) stock is generally defined as a relatively small company with a market capitalization greater than $50 million, but less than $300 million. While the definition can vary between brokers and analysts, stocks are generally divided into these five categories:

Market capitalization and stock price

Whether a stock is classified as a microcap or not has nothing to do with its share price. It's completely possible for a large-cap stock to trade for under $10 per share, just as it's possible for a microcap stock to trade for several hundred dollars per share.

Instead, the classification is based on market capitalization, which is the entire market value of a company's outstanding shares. The market capitalization, or market cap, is typically included in most stock quotes, but it can be calculated by multiplying a company's number of outstanding shares by its current share price.

Because it's based on the current share price, a company's market capitalization fluctuates constantly. A stock is generally classified into one of the categories based on its market cap as of a certain date.

Investing in microcaps

Generally speaking, microcap stocks are riskier and less stable than stocks of larger companies. Many microcaps trade on the pink sheets or OTCBB, which have lower listing standards than the NASDAQ and NYSE. Because of this, there is generally less information and analysis available to investors about microcaps, and therefore it can be tougher to properly evaluate their investment merit.

However, there are exceptions. Some stocks may be classified as microcaps based on the overall market value of their shares, but may have stable profits and trade on a major exchange. As an example, Peoples Financial Services Corp (NASDAQ: PFIS) is a community bank based in Pennsylvania. It trades on the NASDAQ, pays a nice dividend, and has a strong history of profitability.

Words of caution

Although some microcaps could make good long-term investments, it's important to point out that this is not the case for many of them -- especially those that don't trade on the major exchanges, particularly the pink sheets. Because of the extremely limited requirements for publicly available financial information, fraud and market manipulation are quite common in microcaps. So, be extremely cautious when considering a microcap for your portfolio.

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