What it means
Market capitalisation, or market cap, is the total value of a company's shares: the share price multiplied by the number of shares in issue. Companies are grouped by size, and the smallest listed companies are called small-cap, micro-cap and nano-cap.
Micro-caps sit below the well-known small-cap group. These companies are often young, narrowly focused or recovering from difficulty.
A micro-cap might be a local bank, a niche technology business or a small mining explorer. Because they are small, a single new contract or a single bad quarter can move the share price sharply.
The biggest practical issue is liquidity, meaning how easily you can buy or sell without moving the price. Micro-caps often trade only a few thousand shares a day, and the gap between the buying and selling price (the spread) can be wide.
An investor wanting to buy a large position can push the price up just by trading. Information is another challenge, because few analysts follow these companies and reporting requirements may be lighter on some markets.
That gives careful investors a chance to find overlooked bargains, but it also raises the risk of misleading promotion or outright fraud. Reading the accounts yourself is essential.
Professional investors usually hold micro-caps as a small slice of a diversified portfolio. They check cash runway, debt, management ownership and the real daily trading volume before investing.
The potential reward is high, but so is the chance of losing the whole investment. Costs of trading also deserve attention.
A wide spread means an investor can lose several percentage points the moment a position is opened, and selling in a hurry can cost just as much. Using limit orders, which set the maximum price you will pay, is a common way to reduce that damage.
In practice
Real-world examples.
Example
A retired engineer researches a small oil services company with a market value of $120 million and net cash on its balance sheet. He buys a modest holding, limiting it to 2% of his portfolio. If the business fails, the loss will be painful but not damaging. He also writes down in advance the facts that would make him sell, such as a loss of the main customer.
Example
A fund manager looks at a micro-cap software firm whose largest customer provides 60% of revenue. She weighs the potential for growth against the danger of losing that customer. She decides to wait until the company signs a second large client.
Example
A new investor sees an online post promoting a micro-cap share as certain to double. He notices the company has no revenue and very low trading volume, and he recognises the signs of a promotional campaign. He keeps his money and avoids a likely loss. Later, the shares fall sharply once the promotion stops.
Formula
Calculation
Market capitalisation = Share price x Number of shares outstanding
Suppose a company has 25,000,000 shares and a share price of $4. Its market cap is 4 x 25,000,000 = $100,000,000, which puts it in micro-cap territory. Now consider liquidity: if average daily trading volume is 20,000 shares, the daily traded value is 20,000 x 4 = $80,000. An investor wanting to buy $40,000 of the stock would be trading half of a typical day's volume, which would likely push the price up.Case study
Seen in the real world.
Ridgeback Instruments is an illustrative, fictional micro-cap company that makes sensors for water utilities. It has 30,000,000 shares trading at $3, giving a market value of $90,000,000. Few analysts follow it and trading volume averages only 15,000 shares a day.
A small fund discovers that Ridgeback has won contracts that will double revenue over two years while its share price has barely moved. The fund buys slowly over several weeks, limiting each day's purchases to 10% of volume so as not to push up the price.
In this illustrative case, the share price rises to $5.50 as revenue grows and analysts begin to cover the company. The fund's patience pays off, but its partners remember that a single lost contract could have sent the shares down by half.
Watch out
Common mistakes.
- Judging a micro-cap by its share price alone, when market cap depends on the number of shares as well.
- Ignoring trading volume, which determines whether you can sell when you need to.
- Following online tips without checking the accounts, when promotional campaigns often target thinly traded shares.
Questions
People also ask.
What market cap counts as micro-cap?
Definitions vary, but a common range is roughly $50 million to $300 million.
Why are micro-caps more volatile?
They are small, often depend on a few customers or products, and trade in low volumes, so news moves prices sharply.
How much of a portfolio should be in micro-caps?
There is no fixed rule, but many investors keep it to a small share so that losses cannot threaten their overall finances.
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