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What is a Nano Cap?

A. Leverkuhn
A. Leverkuhn

A nano cap stock is a kind of stock with a relatively small market capitalization. These stocks tend to represent new or obscure companies that get a lot less attention from traders, and less regulation from those who police the stock market. These low volume stock offers can be attractive to investors who think that they may bloom into larger and more capitalized companies, but nano stocks do often carry their own special risks as alternative investments.

Market capitalization is the total of all outstanding shares of a stock. For instance, a company with 300,000 total shares at a share price of 1.00 would have a market capitalization of $30,0000. Finance experts came up with a categorizing system for stocks based on market capitalization, beginning with mega cap, mid cap, and small cap stocks. A new category of micro cap stocks was added, where a stock with under $300 million of market capitalization is considered a micro cap stock. Nano cap stocks are an even smaller category, where a company stock offering with a total volume of less than $50 million is considered a nano cap stock.

Man climbing a rope
Man climbing a rope

Nano stocks are also called “penny stocks” if their stock price is under a certain threshold such as $1.00. Lots of traders are enthusiastic about penny stocks because of their growth potential and relatively small downside. However, experts advise against overbuying in micro cap or nano cap stocks based on how much even small events can impact the investment. Seasoned traders say that as often as nano cap stocks hit the big time, they go belly-up just as often.

Another thing that experienced investors know about nano caps is that they tend to carry less public information. With the SEC and analysts focusing on larger stocks, reports of smaller nano cap stocks tend to be more vague. This can make it difficult to make informed investment decisions in these smaller stock offers.

Some investors who like to take the risks involved with nano caps might buy a large quantity of a small stock and hold it for a long time, hoping that some new advance within the company will drive the stock price dramatically higher. These investors argue that nano caps offer a unique opportunity because even if the stock price goes to zero, the holder will lose a relatively small dollar amount per share, while there is always the potential for a small company to get bigger and offer a growth stock. Experienced traders take all of the above issues into account, and look at a nano cap stock according to its technical analysis and information or hunches about future growth.

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