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Investment Red Flags – Micro-Cap Companies

Investment Red Flags - Micro-Cap Companies

Every time I get on the internet to try and find something new to learn about the markets I’m inundated with advertisements selling classes. These classes all seem to follow the same theme – they teach you how to become “rich” on penny and microcap stocks. Some people even get lucky and make some money doing it, but the vast majority is simply throwing money into a pit. Now let me explain why, and also why we have included microcap stocks in our red flags score.

Keeping with our other flags, we have kept it as simple as possible here by only having one line that simply states the following-–Companies whose average market cap over the past year is less than $100 million.

Investment Red Flags - Micro-Cap Companies

Yes, there have been a few spikes in low market cap companies, but as a group they still netted an 8% loss annually on average. Worse yet, there’s no arguing that low market cap stocks and penny stocks are far more volatile than the general market, and this is reflected heavily by the 10.48% monthly standard deviation – over double the benchmark.

If you historically invested in only companies with market caps of less than $100 million, roughly 62% of the companies would have given you a negative return. Yes, there are those few gems, PLUG returned your portfolio 2,625% over 189 days. But the vast majority of micro-cap stocks that you invest in will result in a net loss – even if you have those few great buys to level it out.

For those of you with smaller accounts who have been thinking about purchasing companies like this, I urge you to spend some time reading up on tried and proven investing methods. By simply reading and implementing some of the strategies out of books like The Intelligent Investor, you will almost immediately become a better investor. You will be able to find companies that cost less for you to own, and are more likely to make you a healthy profit in the long-run.

Tyler McCain
Tyler McCain
A student of finance at Georgia State University, Tyler has had a passion for the world of finance for as long as he can remember. Joining the Equities Lab team in 2015 he attempts to juggle the perfect mix of school, work, and giving back to the community. When he isn't working at Equities Lab he can often be found helping teach programs at the Rosen Family Foundation - a non-profit that teaches financial literacy to middle and high school students.

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