Talking about the Stigmas
Investors who are ready to take risks and look for micro-cap ideas often fall victims of pump and dump schemes. Or, they may try out trading on stocks offered by a bankrupt company. This happens when potential investors get influenced by the hype surrounding the stocks. That's why it's important for investors to do individual research on a number of stocks in order to pick the right ones.
Risks to take
High Market Fluctuation - These stocks are traded over-the-counter, and don't have much reputation; since most of them are not listed. The rise and fall of micro-cap prices reverting back to their mean price on a short term basis makes these stocks highly volatile. Once the investors figure that out, it gets a bit easier for them.
Limited information - Taking a plunge to buy stocks without checking out the history or reputation of a company can be risky. There could be very limited information available due to lack of research coverage. During individual research, if you find that the company is relatively new or has a history of a low/negative profit margin, then think twice before you invest.
Lack Liquidity: Micro-cap stocks are thinly traded, and they have low liquidity. Investors may find it difficult when they try to sell these stocks.
Lesser Long term value: Drastic price swings can happen any time, and investors may end up losing their money. Hence, they better be ready for such contingencies, and aim at long term stock growth, even if they lose some in the short-term.
The Brighter Side
Low priced Stocks: The low price gives an opportunity to the potential buyers to pick micro-cap stocks and develop a portfolio by creating the right mix of stocks. This could minimize the investment risk.
Potential High Returns – When investors buy multiple stocks of various companies, some of those companies could get bankrupt, and for some others, stock prices may drop. Also, there could be a few other stocks that are likely to be overlooked. These stocks can have a lot of potential hidden in them that investors tend to miss out on.
Low Market Penetration and High Growth Potential – As mentioned earlier, micro-caps aren't traded widely in the investment market as in the case of large or mid-cap stocks. Hence, there is a huge market that small companies can tap and grow their stocks.
The questions to ask before investment:
Investors who are ready to take risks and look for micro-cap ideas often fall victims of pump and dump schemes. Or, they may try out trading on stocks offered by a bankrupt company. This happens when potential investors get influenced by the hype surrounding the stocks. That's why it's important for investors to do individual research on a number of stocks in order to pick the right ones.
Risks to take
High Market Fluctuation - These stocks are traded over-the-counter, and don't have much reputation; since most of them are not listed. The rise and fall of micro-cap prices reverting back to their mean price on a short term basis makes these stocks highly volatile. Once the investors figure that out, it gets a bit easier for them.
Limited information - Taking a plunge to buy stocks without checking out the history or reputation of a company can be risky. There could be very limited information available due to lack of research coverage. During individual research, if you find that the company is relatively new or has a history of a low/negative profit margin, then think twice before you invest.
Lack Liquidity: Micro-cap stocks are thinly traded, and they have low liquidity. Investors may find it difficult when they try to sell these stocks.
Lesser Long term value: Drastic price swings can happen any time, and investors may end up losing their money. Hence, they better be ready for such contingencies, and aim at long term stock growth, even if they lose some in the short-term.
The Brighter Side
Low priced Stocks: The low price gives an opportunity to the potential buyers to pick micro-cap stocks and develop a portfolio by creating the right mix of stocks. This could minimize the investment risk.
Potential High Returns – When investors buy multiple stocks of various companies, some of those companies could get bankrupt, and for some others, stock prices may drop. Also, there could be a few other stocks that are likely to be overlooked. These stocks can have a lot of potential hidden in them that investors tend to miss out on.
Low Market Penetration and High Growth Potential – As mentioned earlier, micro-caps aren't traded widely in the investment market as in the case of large or mid-cap stocks. Hence, there is a huge market that small companies can tap and grow their stocks.
The questions to ask before investment:
- Is the company that offers stock based in USA?
- Is it a fully-functional company? And how real is it?
- How much news/reports are available on specific stocks?
- What is the historical trend of a company in terms of performance and revenues?
- Are the stocks that you intend to buy, adequately valued to their true price?