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Are Nanocap Stocks a Beneficial Addition to Your Portfolio?
Market capitalization refers to the total dollar market value of a publicly traded company. It is one of the best measures of a company’s size and is calculated by multiplying the number of shares outstanding by the current stock price per share. Market caps can change day to day when stock prices fluctuate, but they are typically classified as nano, micro, small, mid, large or megacap categories. For an entity to be placed in the nanocap segment, it must have a market cap of less than $50 million.
Tremendous Growth Opportunity. Nanocap is the smallest you can get in terms of market capitalization, leaving tons of room for growth. Most successful largecap companies once started at the bottom, and nanocap entities can grow in ways that are impossible for larger corporations. Smaller cap stocks give the investor a chance to get in on the ground floor of new markets, with the hope of it becoming the next Amazon. Any new product or service represents only a small portion of potential revenue, where an established corporation has already engulfed a large part of its target market.
Buy-Out. If a nanocap company decides it wants to sell, it will have many more potential buyers out there than if it was in the mid or largecap range. For many small companies, a buyout is the goal, and it could provide tremendous profits for its shareholders. To ensure the deal is voted through, the buyers will typically pay a significant premium to its current shareholders.
Uncertain. Searching for high returns always comes with associated risks. Nanocap companies are often associated with a higher risk of failure. These stocks also normally see their fair share of pump and dump schemes as they are not as strictly regulated as larger-cap stocks trading on reputable exchanges. Investors will sometimes see reporting gaps and unaudited documents because they are often, but not always, traded on the OTC market and the regulations are more lenient.
High Risk, High Reward. Every company has to have a starting point, and for some, it happens to be at the bottom. Although these stocks come with additional risks, they provide even more potential upsides. Nanocap companies have the potential to create entirely new markets and add enough value to be bought out, which could be just enough motivation for an investor to take on the additional exposure.
https://www.investopedia.com/investing/market-capitalization-defined/, Shobhit Seth, August 28, 2019
https://seekingalpha.com/article/4177531-want-buy-microcap, Jeremy Blum, May 28, 2018
https://www.investopedia.com/terms/n/nanocap.asp, James Chen, November 16, 2017
https://www.investopedia.com/investing/introduction-to-small-cap-stocks/, Troy Segal, June 25, 2019