Micro caps are the very smallest publicly held companies, with market capitalizations of $250-$300 million or less. Stocks of this size are also known as penny stocks, or pink sheets, and are often so small and new that they are not traded on major national exchanges like the NYSE, NASDAQ or AMEX.
Micro caps can represent excellent investment opportunities with potential for returns that are well above average. Shares usually sell at very low prices - often under $1 a pop - and daily trading volume is low because there aren't very many shares outstanding. Micro caps are extremely delicate, and even common events like a press release or a shift in management can cause wild changes in share price.
Micro cap stocks are in perilous positions, and have the potential for rapid collapse as easily as rapid growth. Investors should do as much research as possible on the micro caps they're considering, but this in itself is difficult since most mainstream analysts do not cover micro caps. You will have to rely much more on your own instincts and research when investing in micro caps than when investing in larger, well-known companies listed on major exchanges.
Trading micro caps is as risky as it gets and, no matter how attractive a stock appears, a trader would be well advised not to keep all of his eggs into one basket.