What is a Micro Cap?
Micro cap refers to a category of publicly traded companies with a market capitalization (the total value of all outstanding shares of stock) of less than $300 million. Micro cap companies are considered to be small and typically have limited resources and revenue compared to larger, more established companies.
These companies are often overlooked by institutional investors and are considered to be high-risk investments. The reason for this is that their small size makes them more vulnerable to market volatility, economic downturns, and changes in market conditions. Additionally, micro cap companies often have limited financial resources and are more likely to face challenges when raising capital, which can limit their growth prospects.
Despite the risks, micro cap companies also have the potential for high returns. This is because they are often undervalued by the market and have a significant amount of growth potential, especially if they are successful in attracting investors and growing their business. In some cases, micro cap companies can grow into larger, more established companies, which can result in substantial returns for early investors.
Investing in micro cap companies is typically not suitable for all investors, as the risks are high. However, for those with a high risk tolerance and a long-term investment horizon, micro cap companies can offer an opportunity to achieve high returns.
Simplified Example
Think of a big pizza with slices representing different companies. The bigger the slice, the bigger the company. A micro cap company is like a tiny slice of pizza compared to the big slices of the larger companies. These tiny slices may not have as much toppings (money, resources, and customers) as the bigger slices, but they have the potential to grow and become a bigger slice just like the larger companies. Just like with pizza, investing in a micro cap company can be risky, but it can also be a delicious treat if you choose the right one.
History of the Term "Micro Cap"
The term "micro cap" is first recorded in the 1995-2000 Oxford English Dictionary, defining it as "a company with a market capitalization of less than $250 million." Subsequently, investment publications and financial websites began incorporating the term regularly during the late 1990s and early 2000s, firmly establishing its presence in the financial vocabulary.
Examples
Xunlei Limited (XNET) is a micro cap company that provides a cloud-based high-speed download and file management platform in China. Its market capitalization as of my knowledge cutoff date was around $200 million.
Momo Inc. (MOMO) is a micro cap company that operates a social networking platform in China. As of my knowledge cutoff date, its market capitalization was around $2 billion.
Clean Energy Fuels Corp. (CLNE) is a micro cap company that provides natural gas as an alternative fuel for transportation in North America. Its market capitalization as of my knowledge cutoff date was around $1.5 billion.