What Is a Micro-Cap Stock?

What is a micro-cap stock?

A micro-cap stock is like the small fish in the big pond of the stock market. By definition, these companies have a market capitalization -- total market value, as in the price per share multiplied by the number of shares -- of $300 million or less.

It should be noted that the boundary may vary a bit. Some people set the micro-cap limit at $250 million or even $200 million, and you could subdivide this space even further. For example, a so-called nano-cap stock comes with a market value no larger than $50 million. The whole section also overlaps with small-cap stocks, whose market caps generally stand between $200 million and $2 billion, although some investors lump anything less than $2 billion into this group.

Some people also conflate micro-caps with penny stocks. This makes sense because both classifications point to low values, but they are not strictly the same thing. For example, shares of telecom equipment giant Nokia (NOK +0.33%) have been stuck with single-digit prices since 2011, but its market cap has always been quite large. Sometimes, Nokia meets the definition of penny stocks without coming near the category of micro-caps.

You may run into the opposite situation, too. It's not unusual to see small-cap and micro-cap stocks with stock prices around $100 per share. Remember, companies can manipulate their stock price by performing stock splits or reverse splits, but the market value is based on investors' analysis of the underlying business.

So, a penny stock is not always a micro-cap, and vice versa. They just seem similar at a glance.

Finding the hidden gems

How do you find these elusive micro-cap stocks, you ask? There are various stock screeners available that can help you filter stocks based on specific criteria, such as market capitalization, industry, and various financial metrics. Set the market cap to $300 million or less, and off you go.

Of course, then you need to separate the future winners from gadflies headed for a quick and painful exit. This is where financial analysis comes in. Consider the company's revenue growth, profitability, global expansion plans, unique products, and so forth -- these are the qualities that could take the stock price higher and grow the market cap, too. On the other hand, you should also account for head-to-head competitors, regulatory risks, the cost of doing business, and other business challenges. There is no such thing as a risk-free investment, especially in this crowded corner of Wall Street.

Don't put your hard-earned money to work until you can accept the stock's balance of pros and cons. If your analysis turns up a dark result, it's better to move on and find a better idea.