Stocks | Jun 28, 2007 | 0 Comments

Microcap Stocks Defined

As part of my educational series on FinancialRebel.com, I felt it was important to define microcap stocks.

Microcap stocks aren’t defined well at all. Even the SEC (U.S. Securities and Exchange Commission) does a poor job at telling investors what a microcap stock actually is.

According to the SEC’s Web site, a microcap stock is for a company with “micro or low capitalization.” And if that’s not vague enough, they add that a microcap stock is usually for a company with “limited” assets.

Still confused on what constitutes a microcap stock? You’re not alone.

While various definitions exist in the investing world, there’s one definition that is dominant and it’s one that I subscribe to.

A microcap stock is for a company that has $500 million or less in market capitalization. You can easily find a company’s market cap by pulling up a stock quote—even Yahoo’s free stock quote system shows a company’s market cap. Here’s a stock quote screenshot that shows the market cap information.

Should you want to figure out a company’s market capitalization on your own, here’s the formula:

Company’s market cap = (outstanding shares) x (current price per share)

Low Market Cap, Not Low Share Price

It’s a common misconception that a microcap stock will have a price per share of a couple dollars or less. However, that’s not always the case.

A microcap company with a lower amount of outstanding shares will have a higher share price. It’s not uncommon for shares of a microcap company to cost $5, $10, $15, even $20.

Here are two microcap stock examples. The prices I’m using are during the trading day on June 27, 2007.

Ruth’s Chris Steak House (Symbol: RUTH) has a market capitalization of $395.9 million. They have 23.2 million shares outstanding, and the price per share is $17.07.

Covad Communications Group (Symbol: DVW) has a market capitalization of $255.5 million. They have 297 million shares outstanding and a current price per share of $0.86.

As you can see from these two examples, Ruth’s Chris Steak House has a price per share that’s much higher, because their shares outstanding are 12.8 times lower than the shares outstanding for Covad Communications Group.

And this brings me to an important point. Some investors out there incorrectly think that microcap stocks have to cost $10 or less (or some other stock price).

What makes a stock microcap is the market capitalization—hence the name microcap. The price per share has nothing do with the classification—it’s just a variable that’s based a company’s outstanding shares.

If you’re interested in learning more about microcap stocks, subscribe to my free newsletter “Microcap Stock Tips” at MicrocapStockTips.com.