Micro-cap stocks have long held the allure of high profits, but those profits have come at the cost of higher risk than that of stocks of larger size. Exchange traded funds (ETFs) have been able to moderate that risk slightly by allowing investors to put their money toward a basket of micro-cap stocks instead.
What Are Micro-Caps?
Micro-caps are the smallest publicly traded companies around, with less than $300 million in market capitalization. Typically this means that the company in question is either in its infancy stage or on its way down from being a larger company.
You may or may not have heard of many micro-cap companies. Some of the better-known names include Ruby Tuesday (NYSE: RT) and Kenneth Cole (NYSE: KCP).
Finding solid micro-caps can be a challenging and time-consuming task. Smaller names naturally generate less coverage, so researching them may require additional legwork.
Micro-Caps and Risk
Micro-caps have some real benefits.
For one, they have a lower correlation with large-cap stocks. For instance, some micro caps have a 0.60 correlation with the S&P 500. Most micro-caps may be found on the NASDAQ, OTC BB or the pink sheets.
For another, as with small-cap corporations, their smaller size means they’re more nimble and can shift according to market conditions.
But the most common risks found in micro-cap companies include high debt or bankruptcies in some cases.
It should be noted that many companies categorized as micro-caps have little or no trading volumes, which makes them difficult for an ETF to buy, while other stocks may have market prices less than $1 a share, which fund managers usually don’t touch.