A microcap index tracks the performance of small stocks with market capitalization between $50 million and $300 million. Investors can use it to monitor the overall performance of microcaps and invest in funds linked to specific indices.
A microcap index is a statistical measure of the performance of stocks, called “microcaps,” with small market capitalization levels. Stocks are generally classified as microcaps if their market capitalization, which is the number of outstanding shares owned by investors multiplied by the share price, is between $50 million United States Dollars (USD) and $300 million USD. . There are several different indices, which take a group of stocks and average their performance, dedicated to various groupings of microcap stocks. Investors use a microcap index to track the overall performance of small stocks, which are often extremely volatile as individual investments.
Some investors have the capital to focus their investments only on the established blue-chip companies that command large chunks of the market. Investors looking for bargains may want to focus on micro-cap stocks, which are issued by companies with little or no proven track record. These companies are usually just starting out and represent big potential returns for investors if they can improve their fortunes and catch up with the major players in the market. A microcap index monitors these small stocks as a group.
It is important to note that stocks comprising one microcap index may be slightly different than stocks in a different group of microcaps. For example, some indices are based on stocks from a certain area of the world. Other indices base their inclusions on minimum market capitalization levels, while others only include stocks traded through a stock exchange rather than so-called “over the counter” stocks.
No matter the ratings used, a microcap index takes the market prices of all the stocks within, adds them up, and divides that number by the total number of stocks included. The number that is produced is often of little consequence by itself, but investors can compare it to past totals to see if a trend is developing. A positive trend in microcap stocks may encourage an investor to take a chance on some of these smaller companies.
Another way an investor can use a microcap index is by investing in a fund that is directly related to the performance of a specific index. These funds are essentially mutual funds, pooling capital from various investors who then share in the gains and losses of the securities held in the fund. When an index performs well, investors in a fund linked to that particular index will reap the benefits.
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