Think before you invest in microcaps

Published in the Daily Telegraph, October 2014 by Dale Gillham

Sadly, investors tend to buy microcap shares because they wrongly perceive them as cheap, with many trading at just a few cents. 

But price alone does not tell you if a share is cheap. 

For that you need to compare the real value of the company per share against the current share price.

Investing in microcap shares

For example, a company valued at $1 million, with 1 million shares on issue, means each share is worth $1. 

So a share price of $2 would be expensive whereas 50c would be cheap.

A benefit of a microcap share is that its price can move fast and make you quick money.

However, this is also one of the risks. 

For this reason you need to know a lot more about what you are buying than when you buy a top 20 share.

Microcaps also require you to be aware of liquidity risks.

These shares are traded much less often than bigger ones, so just because you buy a microcap share doesn't mean you can sell it for what you want, when you want.

What to consider before investing in microcap shares

Before buying a microcap I recommend that you ensure they:

  • have revenue coming in from sales,
  • are preferably are profitable,
  • do not have a high level of debt, 
  • they are rising in price by looking at a monthly bar chart.

Oh, and don't let them make up more than 10 per cent of your portfolio.

To learn how you can gain the required knowledge and skill to ensure your success in the stock market click here.

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