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. For example, in recent cases where the
SEC suspended trading in microcap stocks, the average company
had only $6 million in net tangible assets--and nearly half
had less than $1.25 million. Microcap stocks tend to be low
priced and trade in low volumes.
Where Do Microcap Stocks trade?
Many microcap stocks trade in the "over-the-counter" (OTC)
market and are quoted on OTC systems, such as the OTC Bulletin
Board (OTCBB) or the "Pink Sheets."
>OTC Bulletin Board: The OTCBB
is an electronic quotation system that displays real-time
quotes, last-sale prices,
and volume information for many OTC securities that are not
listed on the Nasdaq Stock Market or a national securities
exchange. Brokers who subscribe to the system can use the
OTCBB to look up prices or enter quotes for OTC securities.
Although the NASD oversees the OTCBB, the OTCBB is not part
of the Nasdaq Stock Market. Fraudsters often claim that an
OTCBB company is a Nasdaq company to mislead investors into
thinking that the company is bigger than it is.
>The "Pink Sheets": The Pink Sheets--named
for the color of paper they've historically been printed
on--are a weekly publication of a company called the National
Quotation Bureau. They are electronically updated on a daily
basis. Brokers who subscribe to the Pink Sheets can find
out the names and telephone numbers of the "market makers" in
various OTC stocks--meaning the brokers who commit to buying
and selling those OTC securities. Unless your broker has
the Pink Sheets or you contact the market makers directly,
you'll have a difficult time finding price information for
most stocks that are quoted in the Pink Sheets.
How Are Microcap Stocks Different From Other Stocks?
Lack of Public Information: The biggest difference between
a microcap stock and other stocks is the amount of reliable,
publicly available information about the company. Larger
public companies file reports with the SEC that any investor
can get for free from the SEC's Web site. Professional stock
analysts regularly research and write about larger public
companies, and it's easy to find their stock prices in the
newspaper. In contrast, information about microcap companies
can be extremely difficult to find, making them more vulnerable
to investment fraud schemes. The SEC has proposed new rule
changes that will increase the amount of information brokers
must gather about microcap companies before quoting prices
for their stocks in the OTC market.
No Minimum Listing Standards: Companies that trade their
stocks on major exchanges and in the Nasdaq Stock Market
must meet minimum listing standards. For example, they must
have minimum amounts of net assets and minimum numbers of
shareholders. In contrast, companies on the OTCBB or the
Pink Sheets do not have to meet any minimum standards.
Risk: While all investments involve
risk, microcap stocks are among the most risky. Many microcap
companies tend to
be new and have no proven track record. Some of these companies
have no assets or operations. Others have products and services
that are still in development or have yet to be tested in
the market.
Lois Center-Shabazz is the founder of MsFinancialSavvy.com
and author of the 3-time award-winning personal finance
book, Let's Get Financial Savvy! ISBN #0971979502.
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