Publicly traded companies are categorized according to the amount of investment capital they hold. This is determined by the number of shares they have issued and the price per share. There are “Giant caps” “Large caps” “Mid and Small caps” and “Micro caps”. Microcaps generally have investment capital of less than $500M. By comparison, Small caps have between $500M and $1B market capitalization. Some define Microcaps as having between $200 million and $350 million of market capitalization.
A microcap company is usually a newer company of an age between just issued and ten years old. Some brand new companies are issued and immediately appeal to investors and start out as small or even midcaps. The microcaps I am interested in are newer and relatively unknown. Because they are so new, the products or services they are marketing are almost all innovative. Their products or services are unusual and may take some time to find wide public acceptance and applications to the economy. The following are some examples.
Medicines and medical appliances are innovative. They are developing cures or preventive measures for disease. Research and development can be very expensive and trials of these may take a long time. However, if they prove to be effective, they can find very large consumer demand and be very expensive. The new company can become very profitable in a very short time. On the other hand, many new pharmaceutical companies fail to produce viable medicines or they may fail to be approved by regulators. Investors lose their money.
Some companies develop new materials that have the potential to be used in a wide variety of products. Think of polyester and other petroleum-based plastics. The development of these materials may have taken years and been very expensive yet these have found very wide application in thousands of products. Companies such as DuPont became wildly profitable. Once, they were new, and small.
Globally there has been much discussion about the climate. Many people, and many scientists are convinced that the climate is changing due to human activity; principally by increasing amounts of carbon dioxide being released into the atmosphere. There is wide agreement that this is happening because of the use of fossil fuels to create the energy to power machinery such as cars and trucks. So there is a very strong movement to reduce the consumption of fossil fuels and find alternative sources of energy. This is a disruption to social and economic life. Disruption is the gateway for innovation. Electric vehicles are widely viewed as superior to gas engine cars and will replace them in the near future. This has made Elon Musk, the founder of Tesla, the richest man in the world. Tesla is viewed as the most likely producer of vehicles of the future. Tesla has disrupted the automotive industry.
Due to their small size, newness, and innovative products and/or services, microcaps are risky. They have great potential for gain or loss. For this reason, it is prudent to limit exposure to this asset class. It should be part of a total allocation to equities. It is important to carefully assess your risk temperament to ensure you have the proper allocation. The risk of loss can be mitigated by investing in more than one company and companies of a variety of industrial classes. Since these are typically volatile, it is important to keep a close eye on them and rebalance them as their prices change.
Keep investigating microcap companies. Learn their stories. Check out their management. When you are satisfied this is a company you want to see succeed, invest in it. Your investment returns will follow.