EDUCATION - WHAT IS A MICROCAP STOCK?

What Is A Micro-Cap Stock?
The term 'Micro-cap Stock' is used to refer to stocks that are low priced. Low priced, in this case, refers to stocks that sell at, or less than, five dollars. Micro-cap Stocks generally trade in what is referred to as the Over-the-Counter (OTC) market, which would include the OTC Bulletin Board or the Pink Sheets.

Micro-cap Stocks are also referred to as Penny Stocks.

Where Do Micro-Cap Stocks Trade?
Micro-cap Stocks trade in the Over-The-Counter market generally on the NASDAQ Small Cap, OTC Bulletin Board (OTCBB), or the Pink Sheets. Micro-cap Stocks generally do not trade on the National Stock Exchanges, such as NASDAQ or the NYSE.

How Are Micro-Cap Stocks Different From Other Stocks?
The biggest differences between Micro-cap Stocks and other stocks relate to a lack of public information, listing requirements and investment risk.

Most Micro-cap Stocks do not have the same reporting requirements with the SEC.

Companies on the OTCBB or the Pink Sheets do not have to meet any minimum listing requirements, whereas companies that trade their stocks on major exchanges have requirements relating to total assets, minimum net assets, a minimum number of shareholders and total market capitalization.

Micro-cap Stock investments tend to be high risk because the companies tend to be new and have little or no proven track record.

Are Micro-Cap Stock Investments Risky?
Yes, all stock investments are risky! Especially Micro-Cap Stocks or any other company with little or no operating history. This also allows for explosive growth potential.

Market BasicsTypes of Micro-Caps
What is the "Over-the-Counter" (OTC) market?
Stocks that do not trade on recognized national stock exchanges, such as the New York Stock exchange American Stock Exchange trade in markets described as "over-the-counter" (OTC).

The OTC market is less stringent than national exchanges when it comes to matters such as listing requirements and clarity of investor information. The OTC market exists primarily to give small companies access to public investor capital.

What Is The OTC Bulletin Board?
The OTCBB is an acronym for the Over-the-Counter Bulletin Board. This OTC bulletin Board is described is an electronic quotation system for small companies.
This Electronic Quote System displays Bid, Ask and daily volume to subscribing Broker-Dealers.

What Are The Pink Sheets?
The Pink Sheets, like the Over-the-Counter-Bulletin Board (OTCBB), is an electronic quotation system. The Pink Sheets present quotes from broker dealers for many over-the-counter (OTC) securities. The Pink Sheets are useful for brokers to publish their bid and ask quotation prices.
A privately owned company, Pink Sheets LLC, publish the Pink Sheets. The Pink Sheets electronic quotation system is not registered with the Securities Exchange Commission (SEC) and neither is the company a broker-dealer of the National Association of Securities Dealers (NASD).

The Pink Sheets used to be published daily on pink paper and distributed to broker-dealers. This is where the name Pink Sheets originated. Since the electronic age the distribution of printed pages has ceased and all quotation information is available on line.

What Is The NASD?
The NASD is the National Association of Securities Dealers. NASD is the world's leading private-sector provider of financial regulatory services, NASD has helped bring integrity to the markets - and confidence to investors - of more than 60 years.

NASD has long served as the primary private-sector regulator of America's securities industry. They oversee the activities of more than 5,100 brokerage firms and approximately and 659,000 Stock Brokers.

What Is The SEC?
The acronym SEC stands for the United States Securities and Exchange Commission SEC.
The primary mission of the U.S. Securities and Exchange Commission (SEC) is to protect investors and maintain the integrity of the securities markets. As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, these goals are more compelling than ever.

The SEC operates on the premise that it is only through the steady and comprehensive stream of accurate and reliable information that can people make investment choices of a sound and effective nature. The SEC exists primarily to devise rules and regulations that protect potential investors.

Are There Any Listing Requirements To List In The Pink Sheets?
Pink Sheets listing requirements are very minimal. Some disclosure must be made before listing but it is virtually non-existent.

Are There Any Minimum Listing Standards That Must Be Met In Order To List On The NASDAQ OTCBB Bulletin Board?
The only requirement the OTCBB requires for companies to be fully reporting with the SEC. All filings can be viewed on the SEC EDGAR system.

Market BasicsResearch Micro-Caps

How Do I Get Information About Micro-Cap Stock Companies?
Pink Sheet companies sometimes list information on the Pink Sheets website. Also you can contact the company and ask them for information. Most should have information packages ready to send to you.
OTCBB companies must list their financial reports for Micro-cap Stock Companies can be found at the Security Exchange Commission's (SEC) EDGAR.

If you cannot find the company on EDGAR or get information from the company you can contact your state securities regulator, which should give you access to the most recent reports that the company has filed with its regulators.

What Is EDGAR?
EDGAR, or the Electronic Data Gathering and Retrieval system of the SEC allows companies to both file their own Financial Reports and access the corporate filings of other companies. The EDGAR system can be accessed from the Security Exchange Commission's (SEC) website.

Market Basics
Share Offerings

Do Micro-Cap Stock Companies Have To Register With The SEC In Order To Offer Or Sell Securities To The Public?
Any company that desires to offer or put up shares for sale to the public at large must either register with the SEC or fulfill an exemption. In a general they will either file under SEC Regulation A or D.

What Is A Regulation D Offering?
Smaller companies that offer and sell stocks without registering with the SEC can do so under an exemption which is termed Regulation D. Regulation D exempts companies that look to raise smaller amounts of capital.
Although companies declaring an exemption under Regulation D are not required to register or file reports with the Securities Exchange Commission (SEC) these companies must however file a "Form D". A "Form D" is a document that details the stock offering.

What Is A Regulation A Offering?
Regulation A exempts companies that raise less than five million dollars per annum from registering their shares. Rather than file their securities through the electronic data and gathering retrieval system more commonly known as (EDGAR), these companies are only required to file with the SEC a printed copy of an "offering circular".

This "offering circular" contains financial statements and other corporate information relating to the company.

Market Basics
Micro-Cap Brokers

Who Can Sell Micro-Cap Stocks To Me?
A broker-dealer or a market maker can sell Micro-cap Stocks to the public. E-trade or Scottrade are examples of reputable online brokerages that can and do sell Micro-cap Stocks.

What Are Market Makers?
In the context of Micro-cap Stock investments, market makers are brokerage firms that remain prepared to buy and sell a specific stock on a frequent and continuous basis at a bid or ask price.
Market makers are in constant competition with one another for orders to buy or sell at prices publicly quoted. Market makers must, on the whole, be prepared to buy and sell at least one hundred shares of a stock they develop a market in.

Resultantly, a substantial order requested by an investor could possibly have to be filled by numerous market makers at potentially different prices. If, for example, a broker seeks to buy a stock but there are no offers to sell it, the marker maker will fill the order himself by selling shares from his own account. This works in reverse too where, if a broker desires to sell but there is no buyer; the market maker then buys the shares.

Market makers have an important role to play in providing liquidity in the Over-the-counter (OTC) market, where Micro-cap Stocks tend to trade.

Who Are The Market Makers?
In the Over-The-Counter (OTC) market, a Market Maker is the brokerage firm or trader responsible for maintaining a functioning market in an individual stock by standing ready to buy or sell shares.

What Questions Should I Ask The Broker Who Sells The Micro-Cap Stocks?

Is the brokerage registered with a state securities regulator? Have they ever been investigated or disciplined by a state regulator, the Securities Exchange Commission (SEC) or any other organization, such as NASD or one of the stock exchanges?

How long has the brokerage firm been in business? How many arbitration awards have been filed against the firm?

Have you personally been involved in any arbitration cases? What happened?

Please describe your personal investment philosophy.

Describe your typical client. Please let me have the names and telephone numbers of some of your long-term clients.

How do you get paid? By commission? Amount of assets they manage? Another method?

Do I have any choices on how to pay you? Should I pay you by the transaction? Or a flat fee regardless of the number of transactions?

Do you make more money if I buy this stock rather than another? If you weren't making extra money, would your recommendation be the same?

Are you participating in a sales contest? Is this purchase really in my best interest, or are you trying to win a prize?

How much will I receive if I sell the stock again today?

Where do you send my order to be executed? Can we get a better price if we send it to another market?

How do I find out more about the stock broker who is trying to sell me Micro-cap Stocks?
By contacting the state securities regulator you will be in a position to access information detailing whether or not the stock broker and his or her firm are registered, if they are in a possession of a business license, and if the broker or firm has been the subject of complaint or disciplinary action.

Your broker must reveal to you the bid and offer price quotes for the Micro-cap Stock, as well as the number of share to which the quoted prices apply.

You must be informed of the brokerage firm's compensation for facilitating the trade and the compensation amount allocated to the firm's salesperson.

You must be given monthly account statements giving an estimate of the value of each Micro-cap Stock owned by you.

Your broker must send you a written statement for you to sign that accurately describe your financial situation, your investment experience and your investment goals. This document should also contain a statement of why your firm decided that Micro-cap Stocks are a suitable investment for you.

Market Basics
Due Diligence

What Should I Do If I Want To Make A Micro-Cap Stock Investment?
Before making a Micro-cap Stock investment, a potential investor should research each investment opportunity thoroughly and ask questions. Find out whether the Micro-cap Stock company has registered its securities with the SEC or the state's securities regulators.
Make sure that you understand the company's business and its products or services. Be wary of companies that have no operating history, few assets, or no defined business purpose.

Is the company making money? How they rank in relation to their competitors?
Read carefully the most recent reports the company has filed with its regulators and pay attention to the Micro-cap Stock company's financial statements, particularly if they are not audited or not certified by an accountant.
You should also find out whether the management of the company have ever run into trouble with the regulators or other investors.

How liquid is this investment? How easy would it be to sell if I needed my money right away?

Does this investment match my investment goals?

Is this investment suitable for me?

How will this investment make money? (Dividends? Interest? Capital Gains?)

What must happen for this investment to increase in value?

What are the total fees to purchase, maintain and sell this investment?

After all the fees are paid, how much does this investment have to increase in value before I break even?

Know the brokerage firm and the salespeople with whom you are dealing. The nature of the market for Micro-cap Stock is such that you may have to rely on your original brokerage firm that sold you the stock to trading prices and to buy the stock back from you. Only use reputable brokerage firms such a Scottrade and E-trade where possible.

How Do I Find Out More About The People Running A Micro-Cap Stock Company?
To discover information regarding a Micro-cap Stock company's owners or the particular people running the company you should contact your state securities regulator.

How Do I Know That The Micro-Cap Stock That I Am Considering Investing In Is Not Fraudulent?
The lack of accurate and accessible information about some Micro-cap Stocks means that they are made vulnerable to fraudulent activities. When there is no information available about Micro-cap Stock companies fraudsters are given more leverage to manipulate a Micro-cap Stock and spread false information.

The greater the volume of financial data and other information on a Micro-cap Stock, accessible for the public consumption, the smaller the propensity for fraud taking place.

How Do I Protect Myself From Internet Fraud?
Internet fraud, as it relates to Micro-cap Stock investments, generally involves the distribution of e-mails more commonly known as spam or junk mail. This spam would advertise misleading or false information about a Micro-cap Stock company in the hopes to attract more investors.

Fraudsters also use aliases or "false identities' on Internet bulletin boards and chat rooms to secure anonymity from which they are able to lure potential Micro-cap Stock investors with false investment tips deemed as "inside information".

Being vigilant about internet fraud, understanding the methods used, and most importantly performing thorough research into the Micro-cap Stock company or companies you choose to invest with, are all steps that can be taken to ensure that you do not fall prey to the pervasions of internet fraud.

What Are The Typical Micro-Cap Stock Scams?
Micro-cap Stock scams are most predominately carried out in two ways, the "Pump and Dump" or the "Offshore" scams. The "Pump and Dump" scheme usually involves posted internet messages or telemarketers urge investors to speedily buy micro-cap shares or sell before the price falls. The promoters will maintain that they possess "inside information" about a particular investment or business opportunity.

In reality the promoters may actually be company insiders or hired promoters who will themselves benefit after the sale of their own Micro-cap Stocks once their "promotions" have cultivated an inflated stock price. Investors lose their money once the fraudulent party has sold their own micro-cap shares, the generated hype has died down, and the price inevitably falls.

What Is Regulation S?
SEC Regulation S is a Micro-cap Stock share offer exemption that allows companies to sell stock outside of the United States to foreign or off-shore investors without registering the stock with the SEC.

What Are The Micro-cap Stock Investment Fraud 'RED FLAGS' To Look Out For?
The SEC suspends trading in a Micro-cap Stock if it is under the impression that a company is distributing inaccurate, false or misleading information. If a Micro-cap Stock's shares have been suspended, find out more information.

Be careful of Micro-cap Stock investments where there exists no current financial information on the company but it is both widely recommended and advertised. High pressure sales tactics, where a salesperson speaks very emphatically about a "once in a life time opportunity, not to be missed" and you are being privilege to "confidential, inside information", are clear red flag signals of fraud. Be careful of Micro-cap Stock companies that have large assets but small revenues.

This fraud involves attaching high values on the financial statements to assets completely unrelated to the company itself.

Strange items in the financial statements footnotes, an unusual loan for example, could be another indication that things may be amiss. Strange auditing issues such as a company's auditor's refusal to certify their financial statements or a change in accountants may also signal danger in the Micro-cap Stock investment.

A Micro-cap Stock investor should be careful of situations where insiders own large amounts of the stock in the company and are given the power to control most of the shares. In this situation, it may be easy to manipulate the Micro-cap Stock share price to the detriment of a new investor.

A Micro-cap Stock investor should be careful of investing in a Micro-cap Stock when there is an unwillingness to provide access to written documentation about the Micro-cap Stock investment, including information a potential investor is entitled to in terms of law or regulations.

Where Can I Turn To For Help If I Become The Subject Of A Micro-Cap Stock Scam?
If you find that you have been targeted in a Micro-cap Stock scam you should immediately contact your state's securities regulator and give them all information that you have at your disposal so that they could investigate the matter further.

You should also file a complaint through the Securities Exchange Commission's (SEC) website at their online complaint centre.


Market Basics
Trade Executions

What Happens When I Place An Order To Buy Or Sell A Micro-Cap Stock?
Online brokerage accounts are not connected directly to the securities markets. If you are trading in Micro-cap Stock shares through an online brokerage account, your order to buy or sell it sent over the internet to your broker who then decides which market to send it to for execution. Your order to buy or sell stock is not instantaneous.

What Options Does My Broker Have For Executing My Trade?

If your stock is listed on an exchange your broker can direct your order to that particular exchange, or to another exchange in another area (regional exchange) or to a firm known as a "third market maker". A third market maker is a firm that is, at any time, ready to buy or sell shares listed on an exchange at prices that are publicly quoted. For shares trading in the over-the-counter (OTC) market, your broker can possibly send the order to a market maker in the stock.
Your broker can route your order to what is called an ECN (electronic communications network) which is a network that automatically matches buy and sell orders at specified prices. Your broker can also decide to send your order to another division of the broker's firm and your order is then filled out of the firm's own inventory. This is known as internalization and it allows your broker's firm to possibly make money on the difference between the purchase and sale price (the spread).

What Is "Payment For Order Flow"?
Payment for order flow refers to the way in which regional exchanges or third market makers will pay your broker for directing your order to that specific exchange or market maker.

What Is A Limit Order?
A limit order is an order to sell or buy a stock at a particular price.

What Is A Market Order?
A market order is an order to buy or sell a stock at the current market price and, unless you indicate to the contrary, your broker will enter your order as a market order.

What Is A Bid Price?
This refers to the highest price that a market maker will pay at any specified time to buy a given number of shares in a Micro-cap Stock.

What Is The Ask Price?
The ask price is also referred to as the 'offer' price and refers to the lowest price at which a market maker will sell a specified number of shares of a Micro-cap Stock.

What Is The Spread?
The spread is the difference between the bid price and ask (offer) price. There exists a difference between the two prices because the ask price is certainly always higher than the bid price. Market makers make money on the spread when Micro-cap Stocks are traded.

What Is The Broker's Mark-Up Or Mark-Down?
The price that an investor pays for a Micro-cap Stock includes the profits for the broker and the firm to which he is affiliated. The Brokerage firm is required to inform you of the entire mark-up or commission of your trade. Knowing what the mark-up or mark-down amounts are, will assist you to assess the overall value of the trade.

Market Basics
Monitoring Investments

Where Can I Find Quoted Prices For Stocks I Am Trading In The OTC Market?
Quoted Prices for stocks traded in the Over-The-Counter (OTC) market can be found at OTCBB or at the Pink Sheets. If you are having any trouble in finding quoted prices for your Micro-cap Stock investments, you should contact your Broker-Dealer, who will be able to help you.

Where Can I Check How My Micro-Cap Stocks Are Trading?
The Over-the-Counter Bulletin Board (OTCBB) and the Pink Sheets are both electronic quotation systems that allow one access to the most recent trading information on Micro-cap Stocks.
What Questions Should I Ask About The Progress Of My Micro-Cap Stock Investments?
How frequently do I get statements? Do I understand what the statement tells me? Does the return on my investment satisfy my expectations and is this rate of return a good reflection of what I was originally told to expect? How much money will I get back if I sell the Micro-cap Stocks today? How much am I paying in commission or fees? Have my investment goals changed and are Micro-cap Stock investments still suitable? What criteria should I use to decide when to sell?

What Do I Do If I Suspect That Something Is Amiss After I Have Made A Micro-Cap Stock Investment?
There is a limited time period during which you can take legal action.
You should immediately talk to your broker and explain your concerns. If you suspect that your broker is involved in fraudulent activity, document your complaint straightaway and send it to the firm. If a circumstance arises that your broker is unable to resolve proceed then to the broker's branch manager and re-explain your predicament.

Thereafter, if your problem remains unresolved, document your complaint in written form and send it to the compliance department at the firm's headquarters. If, after this, you are still not satisfied, send a letter to your state securities regulator and attach copies of all the documentation that you previously sent to the firm. You could also use the Security Exchange Commissions (SEC) online complaint form to lodge any complaints or problems that you may have encountered.

Buying Shares In A Micro-Cap Stock That Has Declared Bankruptcy
A Micro-cap Stock investor should be careful when investing in common stock of companies in Chapter 11 bankruptcy. Some people look to purchase the low-priced shares of these Micro-cap Stock companies in the hopes that the price of the shares will rise after the company surfaces from a bankrupt state.

In actual fact, creditors are paid from the company's liquidated assets before common stockholders and the holders of these Micro-cap Stock shares stand a very good chance of losing their whole investment.