Автор: Arataxe
Investing in micro cap stocks
But accurate information about "microcap stocks" - low-priced stocks issued by the smallest of companies - may be difficult to find. Many microcap companies do not file financial reports with the SEC, so it's hard for investors to get the facts about the company's management, products, services, and finances.
When publicly-available information is scarce, fraudsters can easily spread false information about microcap companies, making profits while creating losses for unsuspecting investors. Even in the absence of fraud, microcap stocks historically have been more volatile and less liquid than the stock of larger companies.
Before you consider investing in a microcap company, arm yourself first with information. This Guide tells you about microcap stocks, how to find information, what "red flags" to consider, and where to turn if you run into trouble.
What Is a Microcap Stock? The term "microcap stock" applies to companies with low or "micro" capitalizations, meaning the total value of the company's stock. Microcap companies typically have limited assets and operations. Microcap stocks tend to be low priced and trade in low volumes. Where Do Microcap Stocks Trade? Fraudsters may claim that an OTCBB company is a Nasdaq company to mislead investors into thinking that the company is bigger than it is.
OTC Link LLC OTC Link is an electronic inter-dealer quotation system that displays quotes, last-sale prices, and volume information in exchange-listed securities, OTC equity securities, foreign equity securities and certain corporate debt securities. In addition to publishing quotes, OTC Link provides, among other things, broker-dealer subscribers the ability to send and receive trade messages, allowing them to negotiate trades.
OTC Link organizes securities into three marketplaces based, in part, on the amount and quality of available information: OTCQB - includes the securities of companies that are current in their reporting to the SEC or a U. Lack of Public Information Often, the biggest difference between a microcap stock and other stocks is the amount of publicly available information about the company.
Professional stock analysts regularly research and write about larger public companies, and it's easy to find their stock prices on the Internet or in newspapers and other publications. In contrast, information about microcap companies can be extremely difficult to find, making them more vulnerable to investment fraud schemes and making it less likely that quoted prices in the market will be based on full and complete information about the company.
No Minimum Listing Standards Companies that trade their stocks on exchanges must meet minimum listing standards. For example, they must have minimum amounts of net assets and minimum numbers of shareholders. Risk While all investments involve risk, microcap stocks are among the most risky.
Many microcap companies are new and have no proven track record. Some of these companies have no assets, operations, or revenues. Others have products and services that are still in development or have yet to be tested in the market. Another risk that pertains to microcap stocks involves the low volumes of trades. Because many microcap stocks trade in low volumes, any size of trade can have a large percentage impact on the price of the stock. In general, the federal securities laws require all but the smallest of public companies to file reports with the SEC.
Both types of registration trigger ongoing reporting obligations, meaning the company must file periodic reports that disclose important information to investors about its business, financial condition, and management. This information is a treasure trove for investors: it tells you whether a company is making money or losing money and why.
You'll find this information in the company's quarterly reports on Form Q, annual reports with audited financial statements on Form K, and periodic reports of significant events on Form 8-K. The company then has 30 days to file with the SEC or 60 days to file with its banking or insurance regulator.
Companies must also be current in providing disclosure to be quoted in the OTCQX marketplace, though that requirement can be met by providing information in accordance with OTC Link's proprietary Alternative Reporting Standard rather than through filing with the SEC or a banking or insurance regulator. Companies quoted in the OTC Pink tier are assigned different symbols by OTC Markets, depending on whether they have provided "current" information, "limited" information or "no information.
EDGAR stands for electronic data gathering and retrieval. You'll find many corporate filings in the EDGAR database, including annual and quarterly reports and registration statements. Any investor can access and download this information for free from the SEC's website.
Caution: By law, the reports that companies file with the SEC must be truthful and complete, presenting the facts investors find important in making decisions to buy, hold, or sell a security. But the SEC cannot guarantee the accuracy of the reports companies file.
Some dishonest companies break the law and file false reports. Every year, the SEC brings enforcement actions against companies who've "cooked their books" or failed to provide important information to investors. Read SEC filings - and all other information - with a questioning and critical mind.
But some smaller companies, including microcap companies, may choose voluntarily to file reports with the SEC. As described above, companies that register with the SEC must also file quarterly, annual, and other reports. A Word About Offering Requirements Any company that wants to offer or sell securities to the public must either register with the SEC or meet an exemption.
Here are two of the most common exemptions that many microcap companies use: "Reg D" Offerings Some smaller companies offer and sell securities without registering the transaction under an exemption known as Regulation D. Reg D also exempts some larger private offerings of securities that are sold exclusively to accredited investors and other sophisticated investors. In general, offerings under Reg D are not permitted to use the internet, broadcast media or other means of 'general solicitation and general advertising' to attract investors.
In legislation enacted in called the 'JOBS Act,' Congress required the SEC to permit public advertising in Reg D offerings where securities are sold only to accredited investors and the issuer takes reasonable steps to verify that they are accredited. While companies claiming an exemption under Reg D don't have to register or file reports with the SEC, they must still file what's known as a "Form D" within a few days after they first sell their securities. Form D is a brief notice that includes the names and addresses of owners and stock promoters, but little other information about the company.
You may be able to find out more about Reg D companies by contacting your state securities regulator. Instead of filing a registration statement through EDGAR, these companies file a printed copy of an "offering circular" with the SEC containing financial statements and other information. For more information about the registration requirements and offering exemptions, read Small Business and the SEC.
Many of the microcap companies that don't file reports with the SEC are legitimate businesses with real products or services. Even in the absence of fraud, a lack of public information about a company can make investing in its stock more risky because the prices that are quoted for the stock are less likely to accurately reflect the risks and opportunities associated with the company and its business.
In addition, stocks of such companies may trade only in small volumes. Of potentially greater concern is that the lack of reliable, readily available information about some microcap companies can open the door to fraud. It's easier for fraudsters to manipulate a stock when there's little or no information available about the company. Fraud involving microcap stocks often depends on spreading false information.
Here's how some fraudsters carry out their scams: Email Spam Fraudsters distribute junk e-mail or "spam" over the Internet to spread false information quickly and cheaply about a microcap company to thousands of potential investors. Spam allows the unscrupulous to target many more potential investors than cold calling or mass mailing. Internet Fraud 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.
Paid Promoters Some microcap companies pay stock promoters to recommend or "tout" the microcap stock in supposedly independent and unbiased investment newsletters, research reports, or radio and television shows.
Paid promoters are generally behind the unsolicited "junk" faxes, e-mail messages, or high-end glossy mailers you may receive, touting a microcap company. The federal securities laws require the publications to disclose who paid them for the promotion, the amount, and the type of payment. But many fraudsters fail to do so and mislead investors into believing they are receiving independent advice.
These strangers hound investors to buy "house stocks" - stocks that the firm buys or sells as a market maker or has in its inventory. Questionable Press Releases Fraudsters often issue press releases that contain exaggerations or lies about the microcap company's sales, acquisitions, revenue projections, or new products or services.
These fraudulent press releases are then disseminated through legitimate financial news portals on the Internet. Microcap fraud schemes can take a variety of forms. Here's a description of the most common schemes: The Classic "Pump and Dump" Scheme It's common to see messages posted on the Internet that urge readers to buy a stock quickly or to sell before the price goes down, or a telemarketer will call using the same sort of pitch.
Often the promoters will claim to have "inside" information about an impending development or to use an "infallible" combination of economic and stock market data to pick stocks. In reality, they may be company insiders or paid promoters who stand to gain by selling their shares after the stock price is pumped up by the buying interest they create.
Once these fraudsters sell their shares and stop hyping the stock, the price typically falls, and investors lose money The Latest Variation of the "Pump and Dump" Scheme Some people are finding that they have received a "misdialed" call from a stranger, leaving a "hot" investment tip for a friend. In short, what investors ultimately get from their equity portfolios is paid for by the risks they take.
The Small Firm Effect The first formidable crack in the so-called efficient market theory appeared in the late s when a University of Chicago doctoral student discovered a strategy that has produced superior investment returns for more than 80 years.
Superior meaning that this strategy has historically produced greater returns than dictated by portfolio risk. In an efficient market, the expected rate of return from any portfolio is directly related to its non-diversifiable risk. The greater the level of non-diversifiable risk, the greater the expected rate of return.
Contemporary research, however, indicates that this has not been the case for well-diversified portfolios consisting of small firm common stocks. The small firm effect was first measured in by Rolf Banz while completing his doctoral dissertation at the University of Chicago. Banz ranked NYSE-listed stocks by market capitalization and formed five portfolios containing the largest to smallest stocks listed on the Exchange.
These portfolios were held for five years and then the stocks were re-ranked and new portfolios were formed. He repeated the process throughout the period through He expected portfolios with larger amounts of systematic risk to produce larger investment returns than portfolios with smaller amounts of systematic risk. What he found was a return anomaly that has yet to be fully explained. Over the year period studied, the first four portfolios those containing all but the smallest NYSE firms provided investors with investment returns dictated by the risk of the portfolio, indicating these portfolios were efficiently priced.
Actually, these four portfolios provided investors with an average risk-adjusted monthly return of These portfolios, if anything, were slightly overvalued by the market during this period. On the other hand, the portfolio containing the smallest NYSE companies provided investors with a risk-adjusted excess rate of return of 0. They ranked 3, stocks on the basis of market capitalization and divided them into 10 portfolios containing an equal number of stocks The four portfolios containing the stocks with the lowest market values provided monthly returns of 0.
The remaining six portfolios containing larger company stocks all possessed negative monthly alphas ranging from Thus, the market undervalued small firm stocks during this period and overvalued large firm stocks. The annualized risk adjusted returns for the portfolios of the smallest and largest firms revealed a wide distribution, ranging from 5.
During the last three decades, many researchers who doubted the existence of a small firm effect have subjected stocks of small and large firms to numerous tests using various statistical techniques. All confirm its existence, although its explanation continues to be a subject of ongoing debate.
The Small Firm Effect: A Rationale Whatever the explanation of the small firm effect, it is not because firms are small. Firm size is most likely just a proxy for one or more factors, which highly correlate with firm size. For example, David Dreman popularized the notion that lower valuation multiple stocks tend to outperform higher valuation multiple stocks.
It could be that firm size is a proxy for the low P-E ratio effect. However, recent research indicates the reverse — that the P-E anomaly is actually a proxy for the small firm effect. An examination of the characteristics of small versus large firms reveals striking differences: First, the micro-cap segment of the U. Because of limited liquidity the average daily trading volume of most micro-caps is usually measured in thousands of shares rather than the millions of shares traded daily for large-cap stocks , it is difficult to buy and sell a large number of shares of micro-cap stocks without significantly impacting share price.
As a result, large institutional investors tend to shy away from this sector of the market. Because institutional investors tend to shy away from micro-cap stocks, it is not surprising to find that very few analysts keep tabs on their activities. When research concentration was coupled with firm size, the favorable risk-adjusted returns were magnified. While small firms outperformed large firms during the study period, under-researched small company stocks performed even better.
Another characteristic of small firm stocks is that a significant percentage of their outstanding shares are held by operating management. On average, about one-third of the outstanding shares of companies in the bottom 20 percent of NYSE listed companies when ranked according to market capitalization are held by operating management.
The next 20 percent have less than 5 percent of their shares in the hands of operating managers. That has led some theorists to suspect that a possible explanation for the small firm effect is that the managers of small firms care about share price performance over the long run because they are such large shareholders themselves. The bulk of their wealth is determined by the price of the shares of stock of the companies they manage.
In other words, the objective of outside investors and that of corporate insiders coincide i. As pointed out earlier, the smaller the company the less liquid is its publicly traded stock. That means investors must pay a higher price or receive a lower price when selling large blocks of small firm stocks.
As a result of the increased liquidity risk inherent in small stocks, investors may require a liquidity premium to invest in them. In other words, beta may not capture all of the risk inherent in small firm stocks, and the extra returns provided by small firm stocks may be nothing more than payment for liquidity risk.
Finally, small firms tend to be under-diversified. While most large firms offer multiple product lines or services, small companies tend to be rather narrowly focused. Because of the lack of product diversification, small companies possess a higher degree of unsystematic risk than do large companies.
While a high degree of unsystematic risk may be bothersome to company management, it can be diversified away by investors who maintain well diversified portfolios. On the other hand, large company diversification comes with attendant costs. Thus, it may well be that the superfluous diversification practiced by almost all large companies reduces investment returns more than investment risk. The result is a lower risk-adjusted return than is the case for portfolios that contain the stocks of smaller, more streamlined, firms.
Their initial volume of the Stocks, Bonds, Bills and Inflation Yearbook traced the annual returns of stocks, bonds and Treasury bills back to and they have updated the monthly and annual returns for these categories ever since. The 2. Small company stocks possess significantly more risk than do large firm stocks.
Their annual standard deviation is nearly two-thirds larger than that of large firm stocks. Over relatively short periods of time, small company stock portfolios can experience significant losses. During , the worst year ever for small firm stocks, they lost 58 percent of their value. Furthermore, during the five-year period ending in , small company stocks declined by an average of However, all seasoned investors know the potential for larger investment returns are invariably accompanied by larger investment risks.
While small company stocks have historically outperformed large company stocks over the long run, they may not do so during relatively short periods of time. During 34 of the last 89 years, for example, large company stocks provided larger returns than small company stocks. But even over relatively short time periods such as one-year, the odds of achieving over performance favor small firm stocks.
That is, during the last 89 years, small company stocks topped the returns of large company stocks in 55 years or 62 percent of the time. As can be seen, during three of the last seven decades, large company stock returns exceeded those of small companies. In fact, during the ten-year period ending , small company stocks returned a cumulative total of Although portfolios of small firm stocks are risky, their compound annual returns during each of the last seven decades have been positive.
That is, had you invested in a diversified portfolio of small firm stocks on the first day of each decade and liquidated your investment on the last day of the decade you would never have experienced an investment loss.
START INVESTING AT 18
Here is how you can invest in penny stocks while understanding the risks and increasing your chances of big gains without losing your shorts, shirt, socks, and shoes. What is a micro-cap stock? Most if not all institutional professional investors neglect the micro-cap stock market arena for many reasons; however, some dip their toes in with high risk funds. Brokerages often have different definitions so this can vary. However, a low or more importantly, a declining low share price is indicative of a bad business.
This could be a business on the verge of bankruptcy, engages in deceptive tactics, manipulation, and even fraud. As mentioned before, there are diamonds in the rough that may have fallen on hard times, start-up mode, or going through transition. These types of micro-cap companies have genuine potential and significant possibilities of growing, providing investors with outsized returns.
Is it smart to invest in penny stock and micro-cap stocks? Often novices buy micro-cap stocks because of subconscious psychological factors that is a smaller increase in the share price can create larger returns and profits.
There are many reasons why investors avoid micro-cap stocks. They are often associated with pump and dump schemes, fraud, listed on minor stock exchanges, limited to no reporting standards, and minimal oversight. How to keep from losing your money Now that you have a better understanding, do you still want to give it a go? Here is a practical guide on how to invest in micro-cap stocks. Some brokers have restrictions and restrict investing in these stocks due to the high risks.
There are numerous to choose from and we have reviewed and rated the top brokers for micro-cap investing. Brokers can charge a range of fees as well as minimum account values. Make sure to do your research and select wisely or use our recommended brokers that we have done extensive research already. Switching brokers is doable but timely, difficult, and sometimes costly. If you are using charts and indicators then you are using technical analysis to guide your investing decisions which is more speculative in nature.
If you get an alert from a stock promotion newsletter, website, or email and buy stocks off based on that information it is highly speculative. Make sure to lock in your gains as soon as possible because it could be a pump and dump scheme. Alternatively, investors tend to have a much longer-term outlook on the company.
This means doing extensive research, understanding the business model, and not worrying about the share price but rather if it is undervalued or overvalued. Investors take the buy-and-hold strategy because they are holding for years even decades rather than a short-term speculative trade. Lastly is shorting these stocks. This is more speculative as well but it depends on your approach.
If you are basing it on technical analysis or the share price has risen quickly, it would be speculative. A short selling investor does research and can hold a short position for years. Be sure to start with a small amount, fraction, or allocation of your overall portfolio. Be sure to adjust your allocations over time.
We have ranked these stocks according to their popularity among elite hedge funds. The stock is one of the best micro-cap stocks to invest in since the company has a sustainable business model, it conducts mining operations using renewable energy, and has an industry-leading position. The company's current hash rate capacity sits at 2. The pipeline is expected to become functional in the first half of As of October 13, the stock has a trailing twelve-month PE ratio of 3.
The stock is one of the best micro-cap stocks to invest in right now. PHX Minerals Inc. NYSE:PHX is a natural gas and oil mineral company that produces and distributes natural gas, crude oil, and natural gas liquids. As of October 13, the stock has gained The company has a trailing twelve-month operating margin of Xos, Inc. On September 29, Xos Inc. On October 5, Xos, Inc. Analysts are bullish on Xos, Inc.
At the end of the second quarter of , 9 hedge funds held stakes in Xos, Inc. AXT, Inc. NASDAQ:AXTI develops and manufactures semiconductor equipment that is used in data centers, 5G communications, fiber optic lasers and detectors, and terrestrial solar cells, among other key end-markets. The stock is currently trading at discount levels and the company is profitable. This August, B.
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