In the financial markets or in everyday life, not every challenge to the traditional status quo is successful. In the financial world, microcap stocks are considered hazardous since they are. For every story of meteoric growth, there are many stories of downfall and tragedy.
An examination of historical data indicates a startling trend: a sizable proportion of micro-cap investments fail to provide positive returns. Companies having a market capitalization less than Rs. 500 crore were more likely to lose money. In the last ten years, 39.6% of micro-cap businesses have produced negative returns for their investors (during any five-year period).
Is this implying that microcap investment is a gamble? Not totally, however there are several key aspects to consider before investing in microcaps:
- Long-term growth demands persistence and patience to overcome competitive and economic constraints. However, many microcaps lack the means and skills to overcome these challenges. As a result, many microcaps fail to survive beyond their first development stage, particularly when competing with bigger firms.
- Microcaps have lower visibility and trade less often than bigger businesses. This leads in fewer buyers and sellers, creating erratic trading scenarios. The six-month average trading volumes for large, mid, small, and microcap stocks are 52, 19, 8, and 2 lakhs, respectively. That is, microcaps have extremely limited liquidity.
- Limited media attention makes microcap stocks vulnerable to price manipulation by fraudsters.
- Investors may make unwise assessments while investing in microcaps due to limited information availability.
So, how could one go with micro-cap stocks? The simple answer is that – “for those who are wary of risk, microcaps are obviously a no-go zone”. You may generate wealth in the stock market by investing in other well-known firms, thus microcaps can be given more time to completely mature and evolve into a small-cap or mid-cap, allowing retail investors to analyze better before investing in those.
