The Next Generation of Micro-cap Investors: How the Pandemic Gave Way to New Investment Opportunities in Smaller Companies

While the global pandemic has taken a toll on many businesses and investors, it has also paved the way for a new generation of investors interested in micro-cap stocks and opportunities. As individuals and investors have changed how they live, where they work and what they prioritize, new investment prospects have grown out of the crisis — with micro-cap leading the charge for many newer (and also many savvy) investors interested in finding value and hidden gems.

Micro-cap stocks, typically those in the smallest U.S. companies with a market capitalization of $300 million or less (and often as little as $30 million), can benefit smaller investors since they are often ignored by the bigger players and analysts. Likewise, their share prices can both climb and crash swiftly based on their smaller size, creating an exhilarating risk-reward equation.

Small but mighty

For growth and value investors alike, micro-cap stocks can turn that risk into genuine reward — after all, Apple was once a micro-cap investment.

Notably, micro-cap stocks have outperformed the S&P Growth Index as well as the Russell 2000 Small Cap Index in 2020, sparking more analysts to recommend these small-but-mighty stocks to a growing number of clients. From mid-February to mid-August, the Russell Microcap Growth Index grew more than 7 percent, beating the S&P 500 Growth Index by half a percent. The Russell Micro-cap Technology Index did even better when compared to the S&P 500 Tech Index.

While strategists are starting to pay more attention to micro-caps this year, many of these stocks can still be found at a great value — leading to potential wins for investors willing to do a little research and start small.

From Sherwood Forest to surefire success

Micro-cap clubs are now on the map as are more organizations cognizant of expanded interest in the smallest-of-the-small investment opportunities.

For instance, Robinhood, a free trading app and a true pioneer in commission-free trading, has notched impressive growth in 2020. Launching in 2014 with about 500,000 users, the app now boasts more than 13 million users and plenty of copycats (not to mention the succession of big-name stockbroking apps that followed suit by reducing required deposits, fees and commissions to interest more young investors). Reported revenue in the second quarter was $180 million, up from $91 million in Q1 2020.

One of the few brokers that allow investors to trade cryptocurrency, Robinhood also offers stock, exchange-traded funds (ETF) and options trading, but does not deal in bonds or mutual funds. Previously, these traders had to pay to trade — and invest a minimum of $500 to open an account. Robinhood also appeals to the tech-savvy crowd that prefers the ease and speed of mobile investing.

In true Robinhood rebel fashion, the company shifted the playing field and opened up trading — particularly in crypto — to more novice investors in the United States and across the globe. The company also offers fractional shares, giving the next generation of investors the chance to invest in thousands of stocks for as little as one dollar.

Mining for hidden gems

Since information on micro-caps can be harder to pinpoint, research into these stocks can be more challenging but definitely worthwhile. A little time and effort now can lead to long-term gains, or a really interesting education in the highs and lows of investing.

Several key areas of current micro-cap interest include biotech, mental health and digital transformation, among others, with ample room for research and growth among many categories and companies.

Investors Prism’s PRISM stock indexes track small- and micro-cap companies across a spectrum of innovative industries, including life sciences, medical devices, diagnostics, genomics, biotech and the digital economy.

While small businesses can skyrocket into big success stories, investors still need to recognize that most micro-caps won’t turn into Apple or Google, at least overnight, and that the future of micro-cap investments will always involve some risk and uncertainty. Nevertheless, those looking for something to celebrate in topsy-turvy 2020 might turn a closer eye to the world of micro-cap investments.