The term "micro-cap stock" applies to companies with low or "micro" capitalizations of roughly US$250 million or less. The vast majority of U.S. stocks fall into this category, but they make up only a small fraction of the total stock market value.

The biggest difference between a micro cap stock and other stocks is the amount of reliable, publicly available information about the company. Larger public companies file reports with the SEC that any investor can get for free from the SEC's website. Professional stock analysts regularly research and write about larger public companies, and it's easy to find their stock prices in the newspaper. In contrast, information about micro cap companies can be extremely difficult to find, making them more vulnerable to investment fraud schemes.

Companies that trade their stocks on major exchanges and in the Nasdaq Stock Market must meet minimum listing standards. For example, they must have minimum amounts of net assets and minimum numbers of shareholders. In contrast, companies on the OTCBB or the Pink Sheets do not have to meet any minimum standards.

While all investments involve risk, micro cap stocks are among the most risky. Many micro cap companies tend to be new and have no proven track record. Some of these companies have no assets or operations. Others have products and services that are still in development or have yet to be tested in the market. Another risk that pertains to micro cap stocks involves the low volumes of trades. Because micro cap stocks trade in low volumes, any size of trade can have a large percentage impact on the price of the stock.

Micro cap stocks are notorious for their volatility, and a high percentage of these companies fail to execute their business plans and go out of business. Fraud and market manipulation are not uncommon, and the transactions costs in trading can be quite high.

• Pump and dump schemes, involving use of false or misleading statements to hype stocks, which are "dumped" on the public at inflated prices. Such schemes involve telemarketing and Internet fraud.
• Chop stocks, which are stocks purchased for pennies and sold for dollars, providing both brokers and stock promoters massive profits. Brokers are often paid "under the table" undisclosed payoffs to sell such stocks.
• Other unscrupulous brokerage practices, including "bait and switch," unauthorized trading, and "no net sales" policies in which customers are prohibited or discouraged from selling stocks.