Microcaps Opportunity Risk versus Rewards

We should all know, where there’s risk, there’s an opportunity.  The same aspects that make microcaps (penny Stocks)stocks riskier than large caps make them potentially much more profitable.

Some microcaps companies are new and unproven.  However, small size, properly leveraged, can be turned into big returns for smart and early investors.

These small and unproven companies are eager to grow and are hungry for profits. Thanks to the companies’ small size and developmental stage, the senior management is much more involved in both the strategic decisions and daily operations.  They realize that to successfully challenge the established market leaders they have to bring radically new products, strategies and business models to the market.

Most microcaps companies are virtually unknown not only to general public, but to Wall Street as well. These companies are yet undiscovered and, as a result, frequently undervalued.  This changes when companies start promotion campaigns - As companies get discovered by analysts and investors, their stocks go up in price, frequently in a matter of hours or days.

Critical Advantages of Investing Early Investors that get in early gain two critical advantages – buying at the lowest price per share and investing in a company at its most dynamic stage of development. The combination of these two advantages is what makes triple-digit returns very possible for microcaps stock investments.

Very few large cap stocks gained 150% in a year.  At the same time, there are plenty of microcaps that achieve gains of 500%, 800%, 1000% or even higher in just a few weeks. Here are just some of the examples from the list of companies we have had positions in and/or followed:

Investing Wisely: Risk, Volatility, and Research Not all microcaps make it big and there is substantial risk involved in this type of investment.  All stocks – large caps, small caps and microcaps – are subject to risk and volatility. Microcaps are even more so because of a combination of such factors as lack of regulatory oversight and small trading volumes. 

If you can accept higher risks, then allocating 5-10% of your investment budget to microcaps stocks can be a great option.  5-10% might not be much in terms of dollars, but that’s where microcaps stocks shine.

NOTE:  One of the most important things about microcaps is that they allow you to get into the game and start making money with a very small initial investment.

So, if you can decrease the risk and manage the volatility associated with microcaps stocks, YOU, too, can profit ENORMOUSLY..!

Volatility means price of a stock varies often and widely.  The stock market as a whole goes up and down frequently and vary widely.   All stocks are volatile. Yet, when we look at the stock market’s long-term performance we see that it remains one the most profitable long-term ways to invest.

Microcaps stocks typically do not have long historical records of their performance that can be used to determine a stock’s volatility. That’s why it’s especially important to research the company and its underlying assets. If those are stable, the stock is much more likely to recover from drops caused by short periods of instability – mergers, changes in leadership, etc…

Risk is defined as exposure to loss while in pursuit of favorable outcome. One of the strategies to minimize risk is to limit your investment into microcaps to 5-10% of your total investment portfolio because there will be losses.  The key is in keeping your losses minimal and letting your profits ride. Always do due diligence, research SEC filings, review company forward looking statements and consult a professional market representative

The other key aspect is in thoroughly research stocks before investing .  In its Micro cap Stocks: Guide to Investors, the SEC provides the following steps for researching micro cap stocks

1. Find out whether the company has registered its securities with the SEC or your state's securities regulators.
2. Make sure you understand the company's business and its products or services.
3. Read carefully the most recent reports the company has filed with its regulators and pay attention to the company's financial statements.
4. Check out the people running the company with your state securities regulator.
5. Make sure the broker and his or her firm are registered with the SEC and licensed to do business in your state.

In addition to asking your broker or investment advisor, you can get information from

• The Company
• The SEC’s EDGAR database if the company files with SEC or by sending an e-mail to SEC’s Public Reference Room if it doesn’t at This e-mail address is being protected from spambots. You need JavaScript enabled to view it
• State Securities Regulators.
• Other regulators - visit the Federal Reserve System's National Information Center of Banking Information site, the Office of the Comptroller of the Currency, or the Federal Deposit Insurance Corporation.
• Reference books and databases available at public libraries.
• The Secretary of State where the company is incorporated.

5 Things to Look for When Researching a Microcap Stock

1. Strong balance sheet with little or no debt
2. High gross margins (based on the Profit & Loss reports)
3. Upper management’s level of involvement and compensation (watch out for golden parachutes)
4. Main product or service that is substantially different and better than what’s already on the market or is new and has no competition
5. Loyal customer base

Other Sources of Information About Micro cap Stocks

Needless to say, this research has to be done BEFORE you buy a stock.  Unfortunately, this research is very time consuming and by the time it’s done, the micro cap stock you’ve been thinking about buying might have gained 100%, 500% or even 1000%.

There are literally tens of thousands of microcap companies for you to choose from.  Sifting through even a small portion of these stocks in search for a few potential winners is more than a full-time job. So if you don’t have that much time to spend on research, you will end up relying on someone else’s advice and tips.

That is why many microcaps stock investors subscribe to various micro cap boards and forums to receive stock alerts, watch out for hot tips and listen in on other investors’ conversations as they discuss their choices.  Some of the larger and most popular communities include Raging Bull, Silicon Investor, InvestorsHub, PennyStock and Yahoo! Finance forums. You can get excellent timely information from any one of these sites.  Yet, it’s worth remembering that unlike information directly from the regulators and government databases, these boards are a mixed bag of facts (newsletters and alerts) and personal opinions (forums, hot picks), sometimes crossing into wishful thinking or even outright fraud.

These sites are good at what they do – sifting through thousands of stocks daily and picking the ones with appealing fundamental and financial indicators. Their weakness is often in moderating the chat rooms and forums and preventing fraudsters from posting misleading information.

SEC warns that “Fraudsters often use aliases on Internet bulletin boards and chat rooms to hide their identities and post messages urging investors to buy stock in microcap companies based on supposedly "inside" information about impending developments at the companies.”