Micro-Cap Stock

B is correct. Micro-cap stocks carry the highest risk among equity market cap categories, featuring extreme volatility, very low liquidity, and potential for total loss. Margaret's stated objective of capital preservation directly conflicts with the speculative nature of micro-cap investing. At age 68 with limited retirement savings ($400,000) and modest Social Security income ($2,500/month), she lacks the financial capacity to absorb potential losses and cannot afford the long time horizon needed to potentially recover from micro-cap volatility. A 12.5% allocation to a single speculative micro-cap stock would be unsuitable regardless of the dollar amount.

A is incorrect because 12.5% is actually a substantial portion of her portfolio for such a high-risk investment, and suitability is not determined by percentage alone but by alignment with objectives and risk tolerance. C is incorrect because reducing the amount does not address the fundamental suitability mismatch between her capital preservation objective and micro-cap speculation. D is incorrect because waiting for the company to reach small-cap status does not solve the suitability issue, as even small-cap stocks may be inappropriate for her capital preservation goals.

C is correct. Micro-cap stocks are defined as companies with market capitalizations below $300 million. This is the standard threshold that distinguishes micro-cap from small-cap stocks (typically $300M to $2B).

A ($50 million) represents the very smallest micro-caps but is not the defining upper threshold. B ($100 million) is sometimes used in academic contexts but is not the standard industry definition. D ($2 billion) is typically the upper boundary for small-cap stocks, not micro-caps.

B is correct. Micro-cap stocks exhibit significantly higher volatility (larger price swings) and much lower liquidity (harder to buy/sell without affecting price) compared to large-cap stocks. These characteristics stem from smaller company size, limited trading volume, fewer market participants, and greater susceptibility to news and rumors.

A is the opposite of reality: micro-caps have higher volatility and lower liquidity than large-caps. C is incorrect because micro-caps have substantially higher volatility, not similar levels. While micro-caps do typically offer lower or no dividend yields, this is not their primary distinguishing characteristic. D is incorrect because micro-caps typically have higher beta (more volatile than the market) and minimal analyst coverage, whereas large-caps have lower beta and extensive analyst coverage.

B is correct (the EXCEPT answer). Micro-cap stocks do NOT typically trade on major exchanges with tight bid-ask spreads. Instead, most micro-caps trade over-the-counter (OTC) on markets like the OTCBB or Pink Sheets, where they experience wide bid-ask spreads due to low liquidity. The wide spreads increase transaction costs for investors and reflect the difficulty of finding buyers and sellers.

A is accurate: The defining characteristic of micro-cap stocks is market capitalization below $300 million. C is accurate: Due to low liquidity, limited oversight, and minimal analyst scrutiny, micro-cap stocks are more susceptible to pump-and-dump schemes, market manipulation, and fraudulent practices. D is accurate: Most micro-cap companies have few or no professional analysts covering them, and public information is often limited to basic SEC filings, creating information asymmetry risks for investors.

B is correct. Statements 1, 3, and 4 are accurate characteristics of micro-cap stocks.

Statement 1 is TRUE: By definition, micro-cap stocks have market capitalizations below $300 million, distinguishing them from small-cap ($300M-$2B), mid-cap ($2B-$10B), and large-cap (over $10B) stocks.

Statement 2 is FALSE: Micro-cap stocks typically have LOW daily trading volume, making entry and exit difficult. This low liquidity is one of the primary risks, often resulting in wide bid-ask spreads and the potential for significant price impact when buying or selling even modest positions.

Statement 3 is TRUE: Micro-cap stocks experience extreme price volatility due to their small size, limited float, susceptibility to news and rumors, and the outsized impact that small trades can have on price. Only investors with high risk tolerance should consider these securities.

Statement 4 is TRUE: Most micro-cap companies receive minimal or no coverage from professional analysts, and publicly available information is often limited to basic SEC filings. This information gap creates additional risk as investors must conduct their own extensive due diligence.