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As mentioned above, microcap stocks refer to the companies with market capitalization ranging from $50M to $300M, and such stocks are acknowledged to have high risk/reward ratios . Such investments can be great opportunities for delivering higher returns to those investors who are ready to spend their time on studying the company’s operations.

Advantages of Microcap Opportunities

Trading in microcap stocks has several features which make it profitable in a way that common investors can hardly overlook.

• GROWTH POTENTIAL: Young and often relatively small, these companies have a huge potential for their development and consequently – for high revenues.
• MARKET INEFFICIENCIES: The low analyst coverage means that prudent investors can find misconceptions that make stocks cheap before other investors catch a glimpse of them.
• NICHE MARKETS: Most microcap firms work out of small-scope sectors, which offer the first look at growing trends or technologies.

Risks and Challenges

That being said, microcap investing has its risks which investors need to manage before investing in any microcap stock.

• VOLATILITY: These stocks often fluctuate quite significantly because they have low turnover and tend to be influenced a lot by rumors.
• LIMITED INFORMATION: Information about Microcap companies is generally not readily available or presented in a robust manner hence the assessment of the value of such company is difficult.
• HIGH FAILURE RATE: Due to intense competition and scarcity of resources, majority of microcap firms can hardly make sustainable profitability.

Strategies for Success

However, the risks involved with microcap investing cannot be overlooked all together, therefore, a well thought-out process must be adhered to.

• DUE DILIGENCE: Review the general company information, as well as information about the health of the company’s finances and the sophistication of its management.
• DIVERSIFICATION: This will ensure you do not put all your eggs in one basket making you vulnerable to major risks associated with individual companies.
• LONG-TERM PERSPECTIVE: Time is essential to wait because some of these companies are small and may take years for them to grow.

Microcap opportunities are not for every investor but can be a powerful addition to any solid well-researched diversified portfolio.