Understanding Small Cap, Micro Cap and Nano Cap Stocks

Micro cap value investing

Most American are interested in good investment opportunities.  The United States has the largest market globally of stocks — 34%.  Just before the “great recession” hit in 2008, the Dow Jones Industrial Average (DJIA or “Dow”) saw its largest increase in its history, it had added 900 points.  The Dow monitors the top 30 publicly-traded companies and gives the average for how they did on the stock market that day.  According to the Pew Foundation, nearly 47% of American households own some stock. The U.S. has over 9,000 publicly-traded companies.

Not everyone has the money to invest in larger companies or spend a lot of money.  Often investing in the stock market is compared to gambling and, in a way, it is.  There are risks and rewards and no one should invest anything they need in the short term.  There are other investment opportunities for people with less money to put in.

There are three kinds of smaller stocks that offer good investment opportunities: small cap, micro cap and nano cap stocks.

The Small Cap Stock

The definition of small cap stocks varies a bit.  To many investors, if a stock is listed in the SmallCap 600 index, it is a small cap stock.  This index looks at companies with a market capitalization of under $1 billion (if you multiple the total market price of stock by the number of outstanding shares, that is a company’s capitalization).  Between 1926 and 2001, their average return was 12.27%.  Small cap companies are most often ones that deliver niche goods and services.

The Micro Cap Stock 

Public companies with a low total capitalization are considered to be micro cap equities by the Securities and Exchange Commission (SEC). The market capitalization  for these companies is usually from about $50 to $300 million. This may be a less known route to stock ownership but micro cap investing can offer a way for people with less money to buy stock.

The Nano Stock

These are also called “penny stocks.”  If you’ve seen the movie The Wolf of Wall Street, maybe you’ve heard of them.  The SEC’s definition is any stock sold at under $5 is a nano stock.  Their market capitalization is under $50 million.  These companies are usually start-ups and don’t have stable financial histories.  There are additional rules on selling these stocks and investors ave to be provided full documentation on the risks.  For many people, though, these provide investment opportunities they may not find elsewhere. There are a host of start-ups out there making great strides. Go-Pro, Uber, YouTube all started this way.

One big difference between the three kinds of stock is that there is only an official index for the small cap stocks so it’s harder to measure the performance of one company against another. Harder doesn’t equal impossible. There are a lot stock market research tools available. There are many ways Investors can track a company’s progress.


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