Investors seeking exposure to the smallest companies with the most growth potential would be interested in micro-cap companies. Because of the very small size of these companies, exchange traded funds (ETFs) are an ideal tool to gain exposure.
The term “micro-cap” refers to a company’s market capitalization, or the total value of the company’s stock. Micro-cap stocks tend to be low-priced and have low trading volume. According to the Microcap Stock Guide For Investors, the following information is important to know when investing in these stocks:
- The biggest difference between a micro-cap stock and another asset class is that the latter has less public information about it because of its size. The companies are much more vulnerable and volatile. [Why these companies are positioned for upward growth.]
- Micro-cap stocks are the most risky. Some have no assets or track record, while others are still in R&D mode.
- They have more sensitivity to low trading volume, and any size trade can have an impact on the share price.
Micro-cap companies are the smallest ones – often so small that you may not have heard of them. Each index provider has its own definition of what constitutes a micro-cap. [Do micro-caps have a place in your portfolio?]
For example, Standard & Poor’s defines small cap as companies with a market cap of $300 million to $1.5 billion. Dow Jones looks at the largest 5,000 stocks and numbers 751 through 2,500 are put in the Dow Jones U.S. Small-Cap Total Stock Market Index and numbers 2,501 through 5,000 are placed in the Dow Jones U.S. Micro-Cap Total Stock Market Index. [Growth vs. Value.]
Owning micro-caps in an ETF can be especially advantageous, since, as noted earlier, information on these companies is not as voluminous as information about large-caps. Just be sure to look under the hood to determine you’re getting the sector exposure and expense ratio you want.
For more stories about micro-caps, visit our micro-cap category.
- iShares Russell MicroCap Index (NYSEArca: IWC)
- PowerShares ZACK MicroCap Portfolio (NYSEArca: PZI)
- First Trust Dow Jones Select MicroCap Index (NYSEArca: FDM)
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.