About Microcap

• “penny stocks” –  no universal definition – sec defines it as any stock with a low price (under $5) – a definition that needs updating.  Generally thought of as any low priced, highly speculative stock that usually trades off of the major exchanges (although recent events have shown that ANY company has the potential to become a penny stock, and even become worthless).
• They usually represent very small companies in what you would call the micro- or nano-cap markets (under $250 million in market capitalization).
• This market, however, accounts for the vast majority of U.S. stocks.
• They usually trade over the counter (OTC), with market makers quoting prices on the OTC Bulletin Board (OTCBB) or the Pink Sheets.
• These venues allow for trading in stocks that otherwise would have nowhere to go but be aware – there is a wide spectrum of instruments traded – from bankrupt companies that are essentially worthless, to major overseas corporations that have no desire to conform to increasingly strict U.S. accounting and listing requirements.
• The OTCBB is overseen by the Financial Industry Regulatory Authority (FINRA), and stocks that are quoted must file regularly with the SEC.
• These filings are critical for an investor to be able to research and analyze a company.
• They are available through the Electronic Data Gathering and Retrieval Database (EDGAR) which can be found at www.sec.gov or, www.otcmarkets.com .
• They include:  quarterly reports (10-Q) with unaudited financial statements, annual reports (10-K) with audited financial statements, and current reports (8-K) that inform investors about important events such as changes in control or large acquisitions.
• The Pink Sheets, in comparison, is the wild west.  Companies have no regulatory, filing, or listing requirements – they have no obligation to inform their shareholders about anything! For this reason, it is an extremely dangerous arena to invest in, unless there are extenuating circumstances, and is not where RETHINK would advise our members to put their money.
• It is never a good idea to invest in any market, let alone the volatile microcap market without doing your homework – check our Investing Checklist for a handy reference to help with your research and due diligence.
• Why is a penny stock a penny stock?  There can be several reasons...
  • The company is not viable – They’ve got no cash, no revenues, lots of debt, no growth potential, no business plan, they’re bankrupt – or all of the above.
  • Dilution – the company has issued and continues to issue so much stock that it renders it worthless  - check for evidence in the company filings, look for reverse splits, large amounts of convertible debt, and even call the company’s transfer agent.
  • On a more positive note, there does exist diamonds in the rough, needles in the haystack, stocks of unloved, unpopular, unknown companies that have incredible potential. These can be extremely young companies with a fantastic new technology and huge growth potential, unloved stocks that already make money and can be thought of as ‘value’ plays, or turnaround situations, where a once mighty company has fallen upon hard times and has the potential to be great again.
• Make no mistake about it – there are tremendous opportunities in this market.  Because it is underserved by Wall Street – under-analyzed, under-researched, under-promoted – generally ignored, if not disdained. There is a lot of fertile, untouched ground to cover for those of us willing to do the work.
• As a result – this market is what an academic would call “inefficient”, meaning that securities are often mispriced, either too cheap, or too expensive.  We obviously want to buy the former and sell the latter.