Some market components, such as small capitalization companies, require a little persuasion. Whether it’s their potential to produce incredible gains, or the chance to get in early on a growing industry, small-cap stocks present enticing opportunities. While there is an element of risk attached, most investment strategies benefit from their inclusion.
Traditionally, microcap stocks have a market capitalization of roughly between $50 million to $300 million. With that in mind, some of these companies may have room to grow into mega cap stocks.
Whether a stock is classified as a microcap or not has nothing to do with its share price. It's completely possible for a large-cap stock to trade for under $10 per share, just as it's possible for a microcap stock to trade for several hundred dollars per share.
Instead, the classification is based on market capitalization, which is the entire market value of a company's outstanding shares. The market capitalization, or market cap, is typically included in most stock quotes, but it can be calculated by multiplying a company's number of outstanding shares by its current share price.
Because it's based on the current share price, a company's market cap fluctuates constantly. A stock is generally classified into one of the categories based on its market cap as of a certain date.
Although some microcaps make excellent long-term investments, it's important to point out that this is not the case for many of them – especially those that don't trade on the major exchanges – think pink sheets. So, be extremely cautious when considering a microcap stock for your portfolio and do your research and due diligence before you decide to buy.
For more info on small cap, micro cap, and Canadian stocks, including tips on how to invest, check out the Small Cap Trending News hub on Stockhouse.