INVESTING IN MICRO CAP STOCKS WHAT ARE THE RISKS, AND WHAT ARE THE ADVANTAGES?

Micro Cap stocks, like other stocks in the same category, are generally cheaper than everyday stocks, but with that, they can carry a good deal more risk than the well publicized and traded stocks found on large financial markets, such as the NYSE and the NASDAQ. Why are they so risky when other investments are not?

Micro Cap stocks are only traded via the Pink Sheets and OTCBB (Over The Counter Bulletin Boards) which gives them the advantage of not having to file detailed reports with the institutions that oversee the regular markets. Without this crucial information publicly available, it makes the companies who are behind the floated stocks more difficult to analyze. However, in most cases it is not impossible to find the required information with some targeted searching.

Because of this general lack of reliable information, it is possible for Micro Cap stocks, Penny stocks and other stocks traded over these exchanges to be subject to manipulation in the form of hype, usually delivered over internet message boards, via spam emails, or even over the telephone. Hyping a stock may have the effect of causing panic buying, which in turn falsely increases the value. The inflated stock is then dumped back onto the market en masse, the perpetrators reap a large profit, and everyone else loses their money as the stock falls back to its true value. This method of scamming, known as a ‘pump and dump’ scheme, is not strictly illegal, though it is highly unethical, and can cause chaos for honest investors and companies involved.

Records are kept when these scams are detected, so it’ i possible to find out if any Micro Cap stocks you may be interested in have been subject to manipulation in the past, and extreme caution should be taken if the company has suffered  this sort of abuse of the system in the past.

This is not to say that all Micro Cap stocks are subject to scams. The Pink Sheets and the OTCBB are vehicles for new companies to test the water of the financial markets, and many blue chip companies that trade over the larger exchanges have gotten their start with Micro Cap stocks, Penny stocks and Small Cap stocks.

With diligent research, a level head, and a reasonable understanding of the market place, Micro Cap stocks can be a substantial profit generator for your share portfolio as long as you take care in choosing and analyzing the information that presents itself while researching.