The SEC’s Office of Investor Education and Advocacy is issuing a series of three Investor Bulletins to provide investors with important information to consider before investing in microcap stocks, often known as penny stocks. The Bulletins provide a general overview of microcap stocks and their marketplaces, a list of sources to research microcap stocks, and a list of “red flags” of fraud and other important factors to consider before making an investment in microcap stocks.

WHAT IS A MICROCAP STOCK?

The term “microcap stock” (sometimes referred to as “penny stock”) applies to companies with low or micro market capitalizations.  Companies with a market capitalization of less than $250 or $300 million are often called “microcap stocks” – although many have market capitalizations of far less than those amounts.  The smallest public companies, with market capitalizations of less than $50 million, are sometimes referred to as “nanocap stocks.”  This series of bulletins will use the term “microcap stock” to refer to both microcap stocks and nanocap stocks.

WHERE DO MICROCAP STOCKS TRADE?

Many microcap stocks trade in the “over-the-counter” OTC market.  Quotes for microcap stocks may be available directly from a broker-dealer or on OTC systems such as DBOT ATS, Global OTC ATS, and OTC Link ATS, among other venues.

• DBOT ATS, Global OTC ATS, and OTC Link ATS (as well as other venues) are operated by broker-dealers registered with FINRA and are required to file Form ATS notices with the Commission.  Information about these systems can be found on their respective websites.   These websites are DBOT ATS (https://dbottrading.com), Global OTC ATS (https://www.globalotc.com), and OTC Link ATS (http://www.otcmarkets.com.

HOW ARE MICROCAP STOCKS DIFFERENT FROM OTHER STOCKS?

Lack of public information.  Often, the biggest difference between a microcap stock and other stocks is the amount of reliable publicly-available information about the company.  Most large public companies file reports with the SEC that any investor can get for free from the SEC's website.  Professional stock analysts regularly research and write about larger public companies, and it is easy to find their stock prices on the Internet or in newspapers and other publications.  In contrast, the same information about microcap companies can be extremely difficult to find, making them more vulnerable to investment fraud schemes and making it less likely that quoted prices will be based on full and accurate information about the company.

No minimum listing standards.  Companies that list their stocks on exchanges must meet minimum listing standards.  For example, they must have minimum amounts of net assets and minimum numbers of shareholders.  Companies whose securities are quoted in the OTC market may have to meet the minimum criteria imposed by the trading system.   

Risk.  While all investments involve risk, microcap stocks are among the most risky.  Many microcap companies are new and have no proven track record.  Some of these companies have no assets, operations, or revenues.  Others have products and services that are still in development or have yet to be tested in the market.  Another risk that pertains to microcap stocks involves the low volumes of trades, which may make it difficult for you to sell your shares when you want to do so.  Because many microcap stocks trade in low volumes, any size trade can have a large percentage impact on the price of the stock.  Microcap stocks may also be susceptible to fraud and manipulation.

Additional Information

Investor Bulletin: Microcap Stock Basics (Part 2 of 3: Research)

Investor Bulletin: Microcap Stock Basics (Part 3 of 3: Risk)

For more information about microcap fraud please visit the Microcap Fraud webpage on Investor.gov.