Not quite sure what exactly a microcap stock is? Don't worry, you're not alone. Part of the problem is that there's no cut and dry definition.

Even the U.S. Securities and Exchange Commission (SEC) doesn't give a great definition. According to the SEC, a microcap stock is a company with "low or micro" capitalizations and that these companies have "limited" assets. Could you be more vague?

What is a "low" capitalization and what are "limited" assets? And who decides the translation of these muddy words?

For the most part, many consider microcap stocks to be a company with a market capitalization of $500 million or less. And this is the definition that I use.

Market Capitalization

A company's market cap is the number of shares it has outstanding multiplied by the price per share. For instance, a company with 5,000,000 shares outstanding and a current share price of $2 has a market cap of $10 million.

Market cap = total shares outstanding x price per share

I've created a free newsletter about microcap stocks if you're interested in learning more.

I also cover all stocks and real estate investing at my investing blog, which is located at FinancialRebel.com.

Not Penny Stocks

Don't confuse microcap stocks with penny stocks. Many microcap stocks go well past $1 per share. The price of a microcap stock depends on the number of outstanding shares.

For instance, Ruth's Chris Steak House is a microcap stock in that it's market cap is $393 million. However, the stock price is $17 per share, because they have a low amount of outstanding shares.

As a side note, some Microcap investors wouldn't call Ruth's Chris Steak House a microcap stock, because of the stock price. These investors say a microcap stock can't cost more than $10 per share. This is wrong and foolish, because the very name of the stock type talks about the company's market capitalization and not the share price.