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In the fall, T.L. Stebbins was. on a mission. As chairman of investment banking at Boston-based Adams, Harkness & Hill, he went on a road show preaching that microcap companies have no business being public companies in the current environment.
Microcap, companies have a market value of less than $200 million. Small cap companies have a market value of less than $2.5 billion or $3.5 billion , depending on whom one talks to.
"It now costs $1 million to $2 million to be public in a proper fashion these days," Stebbins said. "(Microcap companies) have no liquidity, no visibility, and there's no market-making capital on the firing line, so 1,500 shares can move the stock 10 percent."
As a result few analysts cover these companies and WA Street investors pay little attention to their stocks.
And coverage matters, said Maria Kussmaul, director of investment research for America's Growth Capital in Boston.
"We've watched volume increase from thousands of shares per day to tens of thousands per day in companies we've picked up that previously had no coverage at all," Kussmaul said.
Two forces conspire against the microcap and small cap companies, Stebbins said.
First, as more investors trade stocks on electronic platforms rather than go to so-called "market makers" like the large Wall Street investment banks, the trading process has undoubtedly become more transparent
Market makers buy shares of stock from sellers when no buyers are immediately available. Later, they'll sell the stock once they find a buyer.
Electronic trading is the most liquid,...