Thread by @ValueEducator

Micro caps are some of the most neglected stocks in the market. When done right, #microcaps can add market beating returns to your portfolio.

A thread on micro caps and 7 reasons why you should consider adding micro caps to your portfolio:

What are Micro Cap Stocks?

While the exact figures for what constitutes a large cap vs a mid cap is different for everyone, the general idea is that large caps are well established companies with lower risk as they have a long history of profitability.

These stocks generally provide stable returns and good liquidity. However, the growth in these companies is lower as they are more mature companies.

On the other end of the spectrum, we have micro cap stocks which are the smallest companies that trade on the stock exchanges.

These companies generally tend to be small businesses without much history or dominant market share. However, a well diversified portfolio of micro cap stocks can provide an opportunity for outsized returns.

Why Invest in Micro Caps?
1. Micro cap investing is best practiced by retail investors
Micro caps are very small companies and generally tend to have a low float. As a result, these stocks have much lower liquidity than large or mid cap stocks.

Buying and selling large quantities of these stocks is not possible without significantly impacting the price. This makes it hard for institutional investors to buy micro cap stocks which is an opportunity for retail investors to benefit

from their growth before institutional holding comes in.

Investing in micro caps is a privilege that retail investors have and institutions do not.

2. Under-researched and under-owned
As a result of low institutional ownership, most of these stocks are not tracked by analysts or get much media coverage. This means that there is less competition for buying the shares of these companies.

This often results in mispricing which informed investors can benefit tremendously.

3. Valuation comfort
The market is generally most efficient for large caps as there is a lot of information about them as well as a lot of analyst and media coverage.

There are also a large number of buyers and sellers for large caps which causes them to be priced close to their fair value.

The undiscovered nature of micro caps and scare information usually results in big discounts in valuation compared to large cap stocks.

4. Small firm effect
Empirical studies on firm size and stock market returns have shown that stock prices of small firms tend to outperform those of large firms over long time periods. This is because smaller firms have greater opportunities to grow than larger firms.

Studies have also shown that while small firms outperformed large firms, under-researched small company stocks performed even better

Some of the best known large caps today also started out as micro caps!!

5. Can be market leaders in a niche
Micro cap companies are not always young companies with little to no track records. Micro caps can also be market leaders in niche industries with a management that has a lot of experience and a long track record

of building and running successful businesses.

Recognizing these companies before the market can also result in high returns.

6. Lower correlation with market
While there are a lot of risks in micro caps, they can also provide some diversification to your portfolio. Micro caps tend to have lower correlation to the market compared to large caps which can help investors reduce risk.

While the larger macro environment does have an effect on micro caps, they are usually more affected by the micro factors due to their small base and under penetration.

7. Volatility and illiquidity can be a positive
Micro caps tend to be more volatile than large or mid cap stocks. They are also less liquid than large or mid caps. But this does not have to be a reason to not invest in them.

Investors can earn a premium for the illiquidity and volatility that they bear for micro caps over long periods of time. This makes micro caps suitable for long term investors and buy-and-hold investors.

While micro cap investing comes with its fair share of risks, it also presents the individual investor with many opportunities to get market-beating returns. The ability to identify tiny companies which can go on to become giants is very unique to micro cap stocks.

Do Check out Micro Cap Club:
bit.ly/3zYY8OS