Small & Micro-cap Stocks: Gold mines to be explored:
[Updated]

Small and micro-cap stocks are low priced scrips which are very less researched and hence are not that popular among the investors/traders. 
Micro-Cap Index, have significantly outperformed both the S&P 500 large cap and Russell 2000 small cap indices over the past five years---herein lies the catch...!!

The stocks in this space might have good management, better future prospects but generallly have  insufficient funds due to which their share is low-priced.
It is a matter of fact that a smaller company tends to grow faster and thus their stock tend to move at faster pace.
Hence always  have this group in your basket if you want to become millionaire very quickly.
It is therefore pertinent to understand that, before underestimating them; keep it in your mind that it might be great opportunity turning your small capital into big amount.

However, small and micro-cap stocks are considered more risky investments due to greater volatility factor. Moreover such stocks might not be so frequently traded on stock exchanges and this make them illiquid many a times.

Micro-cap companies don't generate fat brokerages for brokerage firms, so they rarely enjoy regular research coverage by analysts.
On the other hand it is a disease of some analysts/marketmen to criticise these stocks without checking their fundamentals.
Like in 2001, when the price of Ispat Industries Ltd fell to Rs.1.5, many analysts discarded it on CNBC TV 18. In the same way, when I recommended Radhe Developers Ltd at Rs.7.5, in 2003-04, NDTV Ltd, was up in arms against this scrip.
Similar is the story now with Sanguine Media Services Ltd, an analysts in Zee TV Ltd has already spelt doom for this company without understanding how the company works or what are the future plans of the company. These are some of the things which the investors needs to avoid while watching the business channels, if they want their money to grow on trees.
On the other  hand, these financial/business channels now find no interest to find out what happened to stocks like Kolar Bio Tech, Sree Vasavi Industries Ltd, Alps Infosys Ltd, Cauvery Software Engineering Systems Ltd, Sawaca Communication Ltd, Top Media Entertainment Ltd, etc. where small investors put lot of money.  
Once when I sent strong words against the working of a company (in the telecom and renewable energy space), one of the top brass, said, "Who told you to invest in the shares of our company?"
As if the stock exchanges are meant to offload their junks or create a "Tamasha" of sorts. Financial Media however, find lot of interest in junk news like, "What junior Ambani said to Senior Ambani".
But have not guts to find out why Anil's men are threatening the top bosses of NEPC India Ltd to withdraw their court cases, after NEPC struck a deal to sell their wind farms.....
In a similar case once Mukesh Ambani said, "If people are not happy with the management of Reliance Industries Ltd (though it is a large cap company), they can safely leave this company and buy the shares of some other company."
So, this Mafia culture is present everywhere.....and is not  restricted only to small caps or micro caps.
Business Channels (read NDTV Ltd, Zee TV and CNBC TV18) were running updates after updates on scrips like IFSL Ltd due to obvious reasons, but now.....when most of the institutions have exited (2.18% holding) they find no interest in this once popular scrip during 2003--2005 period. No one knows about their waste management plans and all those "Bullshits" which were so cleverly marketed on these business channels.
So the working of "Media mafia" is another area where the Investors needs to study and keep focus....
THESE ARE SOME OF THE BUSINESS  HAZARDS OF INVESTING IN both SMALL CAPS and Large Caps.

Besides this since, they are not so popular among the masses, it can take more time and effort to analyze a small company than a large one, and fewer published reports means an investor must do more original research.
The result, however, is that micro-cap stocks often don't trade at their full values, creating a price inefficiency from which savvy investors can benefit.

Keeping aside all these factors, a well planned strategy might take you to diamonds hidden inside a coal mine.

When it comes to analyzing a micro-cap company, the approach is the same as for a larger company; only what you emphasize in this analysis will differ.

Like any potential investment, you might start out by assessing the current stock price against its 52-week high/low trading range.

You might glance at valuation ratios, such as the price/earnings multiple or price/book multiple, to see if the stock looks cheap or expensive. Look at the PE and PEG ratio of the stock you and compare it with its peers in the market. A safer way however is to find out the Price/Earnings/Growth (PEG) ratio (PE ratio divided by the projected growth in the next 3-5 years).
You'll probably review the company's financial statements to learn how much net profit is being earned on revenues, how high debt levels are compared to the company's capital base and whether the company is generating cash or burning it.

But before you really enter into the arena ask yourself few more questions:

1. Why are you buying a particular, small/micro-cap stock or what is it that is attracting  you?

2. What is the price at which you must exit the stock?

3. Once decided upon the stock to buy, exercise your mind to know is it really worth buying?

The best strategy to minimize the risk is to plan your exit having decided your expected profits. Do not just pump and dump the stock for reason that it costs you less than other stocks and will reach very high levels one day.

Remember, Small and Micro Caps like Jai Corp Ltd, Matrix Labs Ltd, Lupin Lab Ltd, etc. have made many investors millionaires---you can be one of them, who can say....