Microcap 101
Why microcaps: the corner of the market big money can't reach
A $1 billion fund would need four years to buy the stocks I'm targeting. That's the whole case for microcaps, plus the three things that make it hard.
Educational content, not investment advice. Disclaimer.
Imagine you run a $1 billion fund and you’ve found a great little company worth $150 million. If you buy it the way you’d buy anything else, the trade takes about four years to finish.
That number is the entire reason I’m trading microcaps. Everything else in this post is either a consequence of it or a warning about it.
The math that keeps big funds out
Here’s the setup. A fund wants a normal-sized position: 5% of its money in one stock. It’s buying a $150 million company that trades about $500,000 worth of shares a day. To avoid shoving the price up with its own buying, it limits itself to 10% of each day’s volume, a common rule of thumb for trading carefully.
Those last two numbers are my assumptions, not data, and for plenty of microcaps they’re generous. An SEC staff study found that most stocks under $100 million trade less than $25,000 a day.1 But even with the generous version, watch what happens as the fund gets bigger.
Illustrative arithmetic. Position = 5% of assets. Days = position / (10% x $500K). A $10B fund doesn't fit on this chart: its 5% position would be more than three times the company's total value.
Show the data
| Trading days | |
|---|---|
| Me ($50K) | under 1 day |
| $10M fund | 10 days |
| $100M fund | 100 days |
| $1B fund | 1,000 days |
My bar is the one you can’t see. I need to buy $2,500 worth of stock, and I can do it in a single order before lunch. The $100 million fund needs five months. The $1 billion fund needs about four years, at which point the reason it wanted the stock has probably come and gone.
Then there’s ownership. Here’s how much of the company each buyer would end up owning:
| Buyer | 5% position | Share of the company |
|---|---|---|
| Me | $2,500 | 0.002% |
| $10M fund | $500,000 | 0.3% |
| $100M fund | $5,000,000 | 3.3% |
| $1B fund | $50,000,000 | 33% |
| $10B fund | $500,000,000 | 333% (impossible) |
Once anyone owns more than 5% of a public company, they have to file a public disclosure with the SEC, and the whole market can see what they’re doing. A $1 billion fund that owned a third of a microcap would effectively be running the company, and it would have no way to sell without crashing the price on itself.
So the big funds mostly don’t play. That isn’t snobbery. Their size makes it physically impossible. And because the funds don’t play, the people paid to research stocks for those funds don’t bother either.
Most companies are tiny, and they hold almost none of the money
The size split in the U.S. stock market is more lopsided than most people realize. Sort every listed company by market value and split them into ten groups using the NYSE’s cutoffs, and look at what the smallest group holds:
- Share of companies
- Share of total market value
Value share computed from firm counts and average firm size. Source: Kenneth French Data Library, Portfolios Formed on Size (CRSP)
Show the data
| Share of companies | Share of total market value | |
|---|---|---|
| Under $0.5B | 38.5% | 0.2% |
| $0.5B - $1.2B | 11.8% | 0.4% |
| $1.2B - $2.2B | 8.5% | 0.6% |
| $2.2B - $3.6B | 7.2% | 0.9% |
| $3.6B - $5.2B | 6.3% | 1.2% |
| $5.2B - $7.9B | 5.7% | 1.6% |
| $7.9B - $13.6B | 6.2% | 2.9% |
| $13.6B - $26.9B | 5.6% | 4.7% |
| $26.9B - $68.9B | 5.0% | 9.6% |
| Over $68.9B | 5.2% | 77.8% |
That bottom group (1,221 companies with an average value of $140 million) is where microcaps live. All 1,221 of them together are worth roughly $171 billion, less than any one of the biggest tech companies. The top group (166 companies) holds more than three-quarters of all the money.
If you’re an index fund, a pension or a big mutual fund, the bottom group is a rounding error you can safely ignore. If you’re me, it’s 1,200 companies that almost nobody serious is looking at.
Nobody’s watching
When a large company reports earnings, a crowd of analysts has already published estimates, models and price targets, and the stock reacts within seconds. When a microcap reports something important, the crowd is a lot smaller.
Acuitas manages microcap money, so read its pitch with that in mind. The microcap figure is approximate (about 3). Source: Acuitas Investments, The Case for Microcap (2025), using FTSE Russell and FactSet data
Show the data
| Estimates per stock | |
|---|---|
| Large cap | 16.3 |
| Small cap | 5.5 |
| Microcap (covered) | 3.0 |
Fewer people watching means news can take longer to show up in the price. That’s the theory, anyway, and it’s the reason I’m building a research system instead of buying an index fund. Whether that gap is big enough to make money from, after costs, is the question this whole blog is trying to answer.
The catch, part one: the toll booth
Here’s what the optimistic microcap pitches tend to skip. Every time you buy a stock, you pay the ask price, and every time you sell, you get the bid. The gap between them (the spread) is a cost you pay on every round trip, and in microcaps it’s enormous.
The data is from 2013. Spreads have generally narrowed since, but the size pattern holds. Source: Collver, SEC Division of Trading and Markets (2014)
Show the data
| Median quoted spread | |
|---|---|
| Under $100M | 2.08% |
| $100M - $250M | 0.73% |
| $250M - $500M | 0.33% |
| $500M - $1B | 0.17% |
| $1B - $2B | 0.1% |
| $2B - $5B | 0.07% |
Two percent. If I buy a stock under $100 million and sell it a minute later at the same quoted price, I’ve lost about 2% to the spread alone. A strategy that makes 1.5% per trade on paper loses money in real life. I’ll come back to this in the next post, because it’s the single most common way a microcap backtest lies.
This is also the flip side of the capacity argument. The illiquidity that keeps big funds out is the same illiquidity that costs me 2% a trade. My edge and my biggest expense come from the same place.
The catch, part two: the “small cap premium” might be a ghost
There’s a famous finding in finance, going back to Rolf Banz in 1981 and made mainstream by Fama and French, that small stocks beat big ones over long periods.2 It’s one of the reasons people get excited about this corner of the market.
The long-run data does show it. The recent data mostly doesn’t:
- Smallest decile
- Largest decile
Source: Kenneth French Data Library, Portfolios Formed on Size; annualized from annual returns
Show the data
| Smallest decile | Largest decile | |
|---|---|---|
| 1927 - 2025 | 12.2% | 9.9% |
| 2006 - 2025 | 6.3% | 11.6% |
And the long-run premium has critics. When researchers correct for stocks that quietly delisted with large losses, some of the effect disappears. One study put it bluntly: after the correction, “there is no evidence that there ever was a size effect on Nasdaq.”3 Another found that dropping the very smallest firms (under $5 million) removed the statistically significant effect entirely.4
The last few years show how streaky this corner of the market is:
- Russell Microcap
- Russell 3000
Source: FTSE Russell, Russell Microcap Index factsheet, May 2026
Show the data
| Russell Microcap | Russell 3000 | |
|---|---|---|
| 2021 | 19.3% | 25.7% |
| 2022 | −22.0% | −19.2% |
| 2023 | 9.3% | 26.0% |
| 2024 | 13.7% | 23.8% |
| 2025 | 23.0% | 17.1% |
To be clear about what this means for me: I’m not betting that small stocks go up. If I wanted that, I’d buy a microcap index fund and go back to my day job. I’m betting that a careful, patient investor can find specific situations where the price hasn’t caught up to the facts yet, in a market too small for the professionals to bother with. The benchmark I’ll measure myself against is that index fund. If I can’t beat it, I should just own it.
The catch, part three: the sharks
The same lack of attention that might create opportunities also attracts people who exploit it. Thin trading and little public information make microcaps the favorite hunting ground for pump-and-dump schemes. The SEC describes how they end: “after the promoters profit from their sales, the stock price drops and the remaining investors lose most of their money.”5
Even honest microcaps fail at a brutal rate. Hendrik Bessembinder found that just 4.3% of U.S. stocks accounted for all of the stock market’s net wealth creation from 1926 to 2016, and 58% of stocks failed to beat one-month Treasury bills over their lifetimes.6 A lot of those 58% were small companies.
So the job isn’t finding cheap stocks. Cheap stocks are everywhere down here, and most of them are cheap for good reasons. The job is finding the few where the market hasn’t done its homework yet, and avoiding the many where it has and the answer is bad.
What happens next
That’s the case: a corner of the market that’s structurally closed to big money, lightly watched, expensive to trade, streaky, and full of traps. It’s either a real opportunity for a small, careful investor or an elaborate way to lose $50,000. I don’t know which yet.
Finding out honestly is harder than it sounds, because the easiest person to fool with a backtest is the one who built it. That’s the next post.
Footnotes
-
Charles Collver, SEC Division of Trading and Markets, “A characterization of market quality for small capitalization US equities” (2014). PDF. ↩
-
Rolf Banz, “The relationship between return and market value of common stocks,” Journal of Financial Economics (1981); Eugene Fama and Kenneth French, “The Cross-Section of Expected Stock Returns,” Journal of Finance (1992). ↩
-
Tyler Shumway and Vincent Warther, “The Delisting Bias in CRSP’s Nasdaq Data and Its Implications for the Size Effect,” Journal of Finance (1999). Abstract. ↩
-
Joel Horowitz, Tim Loughran and N.E. Savin, “Three analyses of the firm size premium,” Journal of Empirical Finance (2000), covering 1980 to 1996. ↩
-
SEC Office of Investor Education and Advocacy, investor alert on microcap fraud (2020), Investor.gov. ↩
-
Hendrik Bessembinder, “Do Stocks Outperform Treasury Bills?” Journal of Financial Economics (2018). Summary. ↩