The Biggest Challenge for Small-Cap and Micro-Cap Companies? Lack of Liquidity.

Posted by | September 27, 2012

Over the past twelve months, there has been a significant shift in investor behavior. Today, investors are putting money to work in “safe havens” such as blue-chip stocks that have demonstrated the ability to pay dividends in both good and bad times. As a result, small- and micro-cap stocks are faced with a significant lack of liquidity in the market because investors (and I use that term loosely) aren’t putting their money to work like they used to.

When there’s a lack of liquidity, it hampers an institution’s ability to buy or sell your stock, which creates a self-fulfilling prophecy.  Two things seem to be at play here.

  1. Very little tends to get accomplished in a presidential election year.
  2. We have a very tepid global economy.

This combination has created a marketplace in the United States that is very concerned about near- and medium-term economic growth. Investors hate uncertainty. So, that’s why they are looking for income-generating investments, which in turn is creating liquidity issues for small- and micro-cap public companies.

At Safeguard, the impact has been palpable—our average daily dollar volume this year is half of what it was last year. That is also essentially the case for the Russell Micro-Cap Index. So the liquidity trend that is affecting Safeguard is similarly affecting the majority of small- and micro-cap companies.

There is no simple solution to this problem. In times of decreased liquidity, it’s critical to think outside the box in terms of how to target prospective shareholders. Over the coming weeks, I’ll talk about ways Safeguard is meeting these challenges. Stay tuned for more in my IRO Series.

 

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