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posted on 18 October 2016

Investor Bulletin: Microcap Stock Basics Part 1 Of 3

from the Securities and Exchange Commission

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 the OTC Bulletin Board (OTCBB), OTC Link LLC (OTC Link), or Global OTC.

  • OTC Bulletin Board is an electronic inter-dealer quotation system that displays quotes, last-sale prices, and volume information for many OTC equity securities that are not listed on a national securities exchange. The OTCBB is operated by the Financial Industry Regulatory Authority, Inc. (FINRA). You can read more about the OTCBB marketplace at http://www.finra.org/industry/faq-otcbb-frequently-asked-questions.

  • OTC Link LLC is an electronic inter-dealer quotation system that displays quotes, last-sale prices, and volume information in exchange-listed securities, OTC equity securities, foreign equity securities and certain corporate debt securities. In addition to publishing quotes, OTC Link provides, among other things, broker-dealer subscribers the ability to send and receive trade messages, allowing them to negotiate trades. OTC Link is registered with the SEC as a broker-dealer and operates an Alternative Trading System pursuant to Regulation ATS, and is a member of FINRA. OTC Link organizes stocks into three marketplaces based, in part, on the amount and quality of available information about the particular stock. You can read more about the OTC Link marketplace at www.otcmarkets.com.

  • Global OTC is an electronic inter-dealer quotation system that displays quotes, last-sale prices, and volume information in OTC equity securities. Archipelago Trading Services, Inc., a broker-dealer registered with the SEC, operates Global OTC as an Alternative Trading System pursuant to Regulation ATS. For additional information about Global OTC please visit www.globalotc.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. In contrast, companies quoted on the OTC Bulletin Board (OTCBB), OTC Link LLC (OTC Link) or Global OTC generally do not have to meet any minimum listing standards, but are typically subject to some initial and ongoing requirements. You can find the OTCBB’s eligibility requirements for stocks at http://www.finra.org/industry/faq-otcbb-frequently-asked-questions and you can find additional information about OTC Link and Global OTC at www.otcmarkets.com andwww.globalotc.com, respectively.

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

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


The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

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