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Market capitalization ranks stocks into a number of distinct groups. Micro cap stocks are in the bottom rank and represent companies whose total market capitalization is less than $50 million US dollars (USD). Some add an even smaller rank called nano cap stocks.
The stock price and the number of stock shares issued are combined to determine market capitalization. For example, if XYZ company has issued 1 million shares and the stock price is $0.30 USD, then its market capitalization is $300,000 USD. This makes XYZ company a micro cap company, and its stock shares would be considered micro cap stocks. Such stocks are also sometimes referred to as penny stocks.
This market capitalization ranking is important when considering an investment in a particular company in part because each rank has certain stereotypical features. Micro cap stocks tend to be very risky — they are the stock shares of companies that are just getting started.
The market for these stocks can be very small, and while an investor can purchase the stock, he or she may find difficulty selling it. Micro cap stocks are subject to very large swings in price since the volume is very small. They are also subject to price manipulation; since the market is small, a single investor can influence the price of the stock to his or her own profit at the expense of the other investors.
Getting accurate information on micro caps stocks can also be very difficult. Since the market is small, the media does not pay much attention to these companies. This results in little information getting out about the company, and the information that does get published can be easily manipulated to the advantage of the person releasing the information. Many of the checks and balances that are in place with large cap stocks are simply not there for those in this group.
Most experts recommend avoiding micro cap stocks for people who are not very experienced investors. While there is the possibility of a very large return — after all, every company started out small — the risk of a complete loss of an investment is also very high.