What Micro-Cap Stocks Are & How to Invest in Them

Investors Prisom stocks chart
by Jing Pan, B.Sc, MA

What Are Micro-Cap Stocks?

Those of you who discovered this article by Googling “micro cap stocks 2020” may have been searching for penny stocks. You’re not alone. Many investors will assume that a micro-cap stocks list will be crowded with $2.00 shares, but if that’s the case, they will be disappointed.

There’s a world of difference between micro-cap stocks and penny stocks.

For one thing, penny stocks have low share prices, under $10.00, while micro-cap stocks have no ceiling on their share price.

Micro-caps are grouped by how much a company is worth, or to put it technically, the company’s market capitalization (market cap). Here’s the formula for calculating a company’s market cap:

Market Cap = Price of One Share × Total Number of Shares

Opinions vary, but I’d say that micro-cap stocks are valued in the range of $50.0 to $300.0 million. Here’s a table to help you keep track.

Type of CompanyMarket Cap
Nano-Cap Company< $50.0 Million
Micro-Cap Company$50.0 Million–$300.0 Million
Small-Cap Company$300.0 Million–$2.0 Billion
Mid-Cap Company$2.0 Billion–$10.0 Billion
Large-Cap Company$10.0 Billion–$200.0 Billion
Mega-Cap Company$200.0 Billion <

What’s the Difference Between Micro-Cap Stocks and Penny Stocks?

When you hear TV pundits talk about micro-cap stocks, just know that they’re talking about stocks within a certain bandwidth. Investors could easily pay $20.00, $30.00, or $40.00 per share because micro-caps are not grouped together by share price.

Penny stocks are a whole other ball game. They could have a valuation of $3.0 billion, but a share price of $4.26.

That would fulfill the requirement for being a penny stock, because the share price is under $10.00. But it would fail to pass the micro-cap test, because its market cap is over $300.0 million.

Perhaps a concrete example would help.

Take a look at Bombardier, Inc. (OTCMKTS:BDRBF, TSE:BBD.B). As a manufacturer of airplanes, it’s not surprising that Bombardier is worth $3.0 billion, classifying it as mid-cap stock.

But that doesn’t mean Bombardier stock needs to be expensive. Investors can pick up the stock over the counter for $1.38 a pop, which means it is squarely in the penny-stock camp.

To summarize, penny stocks are designated by low share price. Micro-cap stocks are designated by low market cap.

How to Invest in Micro-cap Stocks

Micro-cap stocks are available on all stock exchanges. Investors can buy them through any broker or trading platform.

That being said, micro-cap stocks require a shift in mentality. They represent smaller companies than what you might be used to. They don’t make headlines every day, and their CEOs aren’t frequent guests on CNBC. Hence, you probably know less about them.

Good micro-cap stocks tend to fit a certain profile; they often have the following characteristics:

  • Low trading volumes
  • Two to three business lines
  • Very little debt
  • Few to no institutional investors
  • A simple capital structure

These are the things I use to spot potential winners.

There are companies like this at every level of the stock market. However, you’re more likely to find them at the micro-cap level. They’re like a pit stop on the road to success.

Think about it: small-cap stocks were once micro-cap stocks. The same is true for large-cap and mega-cap stocks. All of them were once micro-cap stocks.

Now, this doesn’t mean you should pick micro-cap stocks blindfolded. Don’t shut your eyes and throw darts at a board. That’s always a bad idea.

Instead, maybe try investing in a few micro-cap stocks that meet the criteria listed above. Then you could “average up.”

Averaging up means investing more of your money into stocks that do well.

Oddly enough, most people do the opposite. They sell their winners to buy more of their losers, thinking that this will increase their gains in the long term.

Sorry, but that makes no sense to me. Why would you put more money into a bad stock?

Perhaps you’ll take a small hit on your losers, but the idea is to consolidate money in the few stocks that actually deliver gains. If a stock has proved itself to be a good investment, you might want to try doubling down.

You should, of course, make sure that your investment thesis is still solid before doing that. It’s just common sense. But other than that, I think it’s more effective to bet on proven winners than proven losers.

Best Micro-Cap Stocks in 2020?

While our very best stock picks are reserved for out 21st Century Technology Profits newsletter, here are 10 top-performing micro-cap stocks (as of this writing). Note that this for historical reference only; it is not a list of “buy” recommendations.

Company & Stock TickerPriceReturn in the Past 12 Months
Stage Stores Inc (NYSE:SSI)$7.50+1,139%
Cassava Sciences Inc (NASDAQ:SAVA)$8.10+648%
Novume Solutions Inc (NASDAQ: REKR)$3.84+593%
Hebron Technology Co Ltd (NASDAQ: HEBT)$6.45+519%
Workhorse Group Inc (NASDAQ: WKHS)$3.45+333%
Orion Energy Systems, Inc. (NASDAQ: OESX)$3.47+328%
Microbot Medical Inc (NASDAQ: MBOT)$13.06+316%
Bioanalytical Systems, Inc. (NASDAQ: BASI)$5.19+293%
Repro-Med Systems, Inc. (NASDAQ: KRMD)$5.54+292%
Agile Therapeutics Inc (NASDAQ: AGRX)$2.96+261%

(Source: Google Finance, last accessed January 10, 2020.)

As you can see above, investing in just one micro-cap stock could have turned $10,000 into $113,867 in one year! And even if you had picked the 10th stock on the above list, you could have tripled your money if you had invested at the right time.

Don’t kick yourself though, because there are always new winners climbing up the ranks of the stock market. Many of them go public at the micro-cap level before skyrocketing to the billions. The point is to catch them before they get there.

As originally posted on profitconfidential.com

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What Micro-Cap Stocks Are & How to Invest in Them

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