Summary

• Microcap stocks are considered as equities that normally have a market cap in the range of £50 million to £300 million.
• Higher risks and more liquidity problems are associated with microcaps when compared with their large-cap counterparts.
• Despite higher risks and volatility, micro caps have the potential to outperform their large-cap counterparts during the bullish phase of the market.

When an investor decides to invest in the stock market, he has a range of stocks available to choose from. Stocks are generally classified as large cap, mid cap, and small cap, based on the total market capitalisation of the listed companies. While investing one should allocate funds to various investments such as equity, debt, gold. Within equity, one should allocate funds to large, mid, and small cap stocks.

Given the significant upside potential of smaller cap stocks, the investors are looking in the direction of microcap stocks, as they are among the best performers in the UK stock market in the last few quarters.

Microcap stocks are considered as equities that normally have a market cap in the range of £50 million to £300 million. The market capitalisation of microcap companies is more than nano-cap companies, and less than small-cap, mid-cap, large-cap, and mega-cap corporations. But it is not necessary that companies with larger market cap will have will innately have higher stock process. Market capitalisation is basically used to measure the market value of the outstanding shares of a company, and it is calculated by multiplying the price of the stock by the total number of outstanding shares.

Microcaps vs larger caps

Microcap stocks inherently tend to have greater volatility and are riskier as compared to large cap stocks. Due to the limited availability of information related to such stocks, it is of utmost importance to carry out a meticulous research to steer clear of unauthorised and fraudulent stocks, as well as keep an arm’s length from other potential pitfalls. Because of less institutional buyers and insufficiency of analyst coverage, micro caps also face the problem of limited liquidity, which is not commonly seen in larger caps. The number of microcap stocks are way more in comparison to larger stocks, and thus it is extremely difficult but necessary to identify the profitable stocks, even though the research will be difficult and time consuming.

Micro caps are usually associated with higher risks because many of them have no solid history, operations, assets, or sales, and many of them have unproven products. The exposure of micro caps to price shocks is also quite high due to lack of liquidity and a comparatively smaller base of shareholders than larger caps. Even though the volatility of micro caps is higher, and the risks associated with it are greater, micro caps have the potential to outperform their large cap counterparts during the bullish phase of the market.

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Dealing in microcaps

Microcaps are usually not listed on national exchanges, such as the London Stock Exchange or the New York Stock Exchange. Unlike the larger stocks which are listed on these big exchanges, many of the microcap stocks are not able to meet the minimum requirements and standards of eligibility, such as number of shareholders and net assets. Therefore, microcap stocks can thus be found on the over-the-counter markets instead, which follow relaxed and flexible regulations.

As mentioned above, the major drawback of microcap stocks is lack of liquidity, and the investors need to pay utmost attention to analyse the liquidity factor while conducting research on smaller companies. Because analyst coverage is not carried out regularly, and also the number of institutional buyers of microcap stocks is also quite less, the liquidity problem of these stocks is aggravated. 

The investors are offered a high-risk, high-reward opportunity through microcap stocks, but only if they are willing to diligently conduct more research on the smaller companies involved. Before investing in microcap stocks, it is paramount to ensure that the investment is worth it and will offer lucrative gains in the long run. Apart from conducting secondary research, the investors may also directly contact such small companies to get the required answers for all the queries they have.

Top microcap stocks on LSE

Being among the best performing sectors in UK, various microcap stocks are also listed on the London Stock Exchange. The top microcap stocks listed on the LSE at present include Futura Medical PLC (LON:FUM), Carclo PLC (LON:CAR), Ferro-Alloy Resources Ltd (LON:FAR), Lookers PLC (LON:LOOK), Assetco PLC (LON:ASTO), Afritin Mining Ltd (LON:ATM), Tern PLC (LON:TERN), SkinBioTherapeutics PLC (LON:SBTX), Nanoco Group PLC (LON:NANO), and Helium One Global Ltd (LON:HE1).

Leaving out the investment companies, there are more than 100 listed microcap companies, which have market cap less than £100 million, but these companies only represent around 0.2% of the total market value. There are 50 other companies having market cap in the range of £100 million to £200 million also add 0.4% of the total market value. But the companies are listed on the Alternative Investment Market of LSE treble the number of stocks.