Micro-cap, small-cap and penny stocks represent shares in small companies that are usually traded "over the counter." They range from stocks in very small companies that are governed by very few regulations to shares of growing companies that are traded on organized exchanges and tracked by stock market analysts. The definitions of micro-cap and small-cap stocks are connected to the value of their market capitalization, whereas penny stocks are defined by their price per share. Penny stocks are extremely risky, but small-cap and micro-cap stocks include shares with potential for rapid growth. Many successful high-tech companies started as small- or micro-caps.
The U.S. Securities and Exchange Commission defines micro-cap stocks as shares in companies that have low overall market values. Some companies that issue stocks are so small that they do not have to register their shares with the SEC as they have fewer than 500 investors and a total market capitalization, or value of all shares issued, of less than $10 million. These stocks are considered micro-cap stocks, as are stocks of any companies with total market capitalization of up to $500 million.
Ratings provider Standard & Poor's defines stocks with market capitalizations of up to $1 billion as small-cap stocks. Small-cap stocks may include some micro-cap stocks issued by companies valued at the higher end of the micro-cap scale, or between $300 million and $500 million. The terms small-cap and micro-cap are not necessarily official, as different brokers and fund managers use them differently for marketing purposes. However, the lowest valued micro-cap stocks are rarely referred to as anything else but micro-cap.
The SEC refers to a penny stock as one that trades for less than $5 per share and is not traded on any of the main or regional U.S. stock exchanges. Penny stocks are almost always shares in micro-cap stocks, and they are often traded very infrequently so their true value is unknown. While micro-cap and small-cap stocks that are duly registered with the SEC may represent new and entrepreneurial companies with great growth potential, penny stocks are fraught with risk and subject to fraudulent market manipulation because of their lack of formal regulation.
If you are looking for the next breakthrough communications or medical technology firm, you probably won't find it among the "pink sheets" or penny stock offerings that an inexperienced and unlicensed broker pitches to you with spam messages and unwanted phone calls. You can find potential breakthrough stocks either by conducting real research into small-cap and micro-cap stocks that are registered with the SEC and traded as part of the Standard & Poor's or Dow Jones indexes or by buying mutual funds that invest in such stocks. Penny stocks are basically a form of gambling, and unless you collect stock certificates for pleasure. Contact a licensed stock broker or certified financial adviser for more information on investing in shares of companies with lower market capitalization.
John DeMerceau is an American expatriate entrepreneur, marketing analyst and Web developer. He now lives and works in southeast Asia, where he creates websites and branding/marketing reports for international clients. DeMerceau graduated from Columbia University with a Bachelor of Arts in history.