The small-cap glossary

Affiliate

Broadly, someone who controls or is controlled by the company — officers, directors, and generally holders of more than 10%. Affiliate shares are excluded from public float and their sales are restricted under Rule 144, which is why float and shares outstanding differ so much in small caps.

See also: Float, Rule 144

Ask

The lowest price a seller is currently willing to accept. You pay the ask when you buy at market. In thin small caps the ask can sit far above the last traded price.

ATM offering (at-the-market)

A programme letting a company sell newly issued shares directly into the open market over time, at prevailing prices, entirely at its own discretion. There is no announcement when sales happen — you find out from the rising share count in the next quarterly report. An active ATM is the most common explanation for a small cap that cannot seem to rally on good news.

See also: How to read an SEC filing

Average daily volume (ADV)

The mean number of shares traded per day over some window. Use a 50- or 90-day figure: a 10-day average is badly distorted by a single spike day. Always convert to dollar volume before judging liquidity.

Authorized shares

The maximum number of shares a company's charter permits it to issue. When a proxy asks shareholders to raise this ceiling, read it as a statement of intent to issue more stock.

Baby shelf rule

Under General Instruction I.B.6 of Form S-3, a company with a public float under $75 million may not sell more than one-third of that float in any trailing twelve-month period on a primary basis. Capacity scales with the share price, so a rally directly increases how much the company is permitted to sell into it.

Bid

The highest price a buyer is currently willing to pay. You receive the bid when you sell at market.

Bid-ask spread

The gap between bid and ask, and a real cost you pay on entry and exit. On a $0.40 stock a two-cent spread is 5% — larger than most traders' entire profit target. Treat the spread as part of your stop distance in illiquid names.

Borrow fee

The annualised cost of borrowing shares to sell short. A rapidly rising fee is one of the few genuinely real-time signals in this market, because it comes from the lending desk rather than a twice-monthly regulatory filing.

Cash runway

Cash on hand divided by the rate at which the company consumes it — how long before it must raise money or stop. It is the single most predictive number for a pre-revenue small cap, and it is not a standard screener field. Compute it yourself from the cash flow statement.

See also: Cash runway calculator

CIK

Central Index Key — the permanent identifier the SEC assigns each filer. Tickers and company names change; the CIK does not, which makes it the reliable way to track a company through rebrands and reverse mergers.

Convertible note

Debt that converts into shares. Terms matter enormously: a note converting at a fixed price is ordinary financing, while one converting at a discount to the prevailing market price creates more shares the lower the stock goes.

See also: Variable rate convertible

Cover page

The first page of a 10-K or 10-Q, carrying the share count outstanding as of a recent date. It is the most current authoritative count available and is more reliable than any screener field.

Days to cover

Shares short divided by average daily volume — roughly how long it would take short sellers to buy back their position at normal volume. Generally more informative than short interest as a percent of float, because it accounts for liquidity.

Death spiral financing

Informal name for convertible debt whose conversion price floats down with the share price. Each conversion adds shares, the added supply pushes the price lower, and the lower price entitles the holder to still more shares. It has destroyed more micro-cap equity than any other single structure.

Delisting

Removal from an exchange for failing continued-listing standards — minimum bid price, market value, stockholders' equity, or timely filing. The stock usually continues trading on an OTC tier with far less liquidity.

Dilution

The reduction in what each existing share represents when new shares are created. Your share count doesn't change; your claim on the company shrinks. In small caps it arrives through offerings, warrant exercises, note conversions and employee plans.

See also: Dilution calculator

EDGAR

The SEC's public filing database. Free, complete, and the primary source for everything on this page. Paid tools add alerts and parsing; they do not add documents.

EFFECT

A short notice confirming a registration statement has become effective — the moment registered shares actually become sellable. Easy to miss because it contains almost no text, and important because for a resale registration it marks when the supply arrives.

Enterprise value

Market capitalisation plus debt minus cash. Usually a more honest measure of size than market cap: a $40M market cap carrying $35M of debt is a $75M enterprise, and the equity is a thin slice on top of a large obligation.

Expert Market

An OTC venue where quotes are not publicly displayed and most retail brokers accept only unsolicited orders. Securities land here when they fail to provide current information. Effectively very difficult to trade.

Failure to deliver (FTD)

A trade where shares were not delivered by the settlement date. FTDs arise from mundane operational causes as well as from naked shorting, so a high count is evidence of settlement friction, not proof of manipulation.

Float

The portion of shares outstanding that can actually trade — outstanding minus restricted and closely-held stock. It is a vendor estimate, not a reported figure, and vendors routinely disagree by 20–30% on the same micro-cap. A small float doesn't make a stock rise; it makes it move further per dollar of demand, in both directions.

See also: Float and short interest explained

Form 4

An insider's report of a transaction in company stock. The transaction code carries the signal: P is an open-market purchase and S a sale, while M (option exercise) and A (grant) are compensation events that say little about conviction.

Form 12b-25 (NT 10-K / NT 10-Q)

Notification that a periodic report will be late, granting a short extension. One may be innocuous; a pattern of them indicates an accounting, auditor or solvency problem.

Form 144

Notice filed by an affiliate intending to sell restricted stock. It signals an intention, not a completed sale.

Going concern (substantial doubt)

A specific accounting conclusion that there is substantial doubt about the company's ability to continue operating for the next twelve months. It is not boilerplate. Search any 10-K or 10-Q for the phrase “substantial doubt” before buying a micro-cap.

Good faith violation

In a cash account, buying with unsettled proceeds and selling the new position before those proceeds settle. Repeated violations get the account restricted for 90 days. US equities settle on a T+1 basis.

Halt (trading halt)

A pause in trading, either for volatility or pending news. Nothing trades while a stock is halted, so your stop order cannot execute, and the reopen can be several points away. Halts are the most common way a carefully calculated risk becomes a much larger loss.

Hard to borrow

A stock for which lendable shares are scarce, reflected in high utilisation and a high borrow fee. It makes shorting expensive and is a precondition — though not a guarantee — of a squeeze.

Institutional ownership

The share of a company held by professional managers, visible in quarterly 13F filings that arrive with a lag of up to 45 days. Very low institutional ownership is characteristic of micro-caps and is part of why they are less efficiently priced.

Limit up-limit down (LULD)

The mechanism that pauses trading when a stock moves outside a price band within a short window. It is why volatile small caps halt repeatedly on big days.

Locate requirement

Under Regulation SHO, a broker must have reasonable grounds to believe shares can be borrowed before executing a short sale.

Lock-up

A contractual restriction preventing insiders or placement investors from selling for a set period after an IPO or financing. Expiry is a known, scheduled date on which float can increase sharply.

Market capitalisation

Share price times shares outstanding. In small caps it is frequently stale, because the share count comes from the last filing and may predate a large offering.

Micro-cap

No official definition; commonly a company valued roughly between $50 million and $300 million. Below that is often called nano-cap. The labels matter less than float, liquidity and dilution capacity.

Naked short selling

Selling short without having borrowed or arranged to borrow the shares. Generally prohibited under Regulation SHO's locate and close-out requirements. Persistent delivery failures are sometimes cited as evidence of it, though they have other causes.

Net cash

Cash minus total debt. A company trading below its net cash is occasionally a genuine opportunity and more often a business burning that cash quickly — check the runway before deciding which.

OTCQB

The venture tier of OTC Markets. Requires current reporting, a minimum bid price and an annual verification. A real, if modest, disclosure floor.

OTCQX

The highest OTC tier, with financial standards and a prohibition on shell companies.

Outstanding shares

Every share the company has issued and that remains issued. Found on the cover page of any 10-K or 10-Q. The denominator for market cap, and the number to compare across years to detect dilution.

Pattern day trader (PDT)

Under FINRA Rule 4210, someone executing four or more day trades within five business days in a margin account, where those trades exceed 6% of total trades in the window. Triggers a $25,000 minimum equity requirement. It catches a great many new traders who had no idea the rule existed.

See also: Position sizing for small accounts

Pink tier

An OTC tier subdivided by how much information a company provides — from current, through limited, to no information at all. Fundamental screening is meaningless on names with no current information.

PIPE

Private investment in public equity — a private placement to selected investors, usually at a discount and often with warrants attached. The shares are restricted until a resale registration goes effective, which is when the supply reaches the market.

Placement agent

The bank or broker that arranges an offering and takes a fee, typically several percent of gross proceeds plus expenses. The company nets less than the headline raise.

Public float

See Float. The term used in SEC rules, including the $75 million threshold in the baby shelf rule.

Registered direct offering

A sale of registered shares directly to selected investors, usually priced at a discount to market and often completed overnight. Typically disclosed in a 424B5 prospectus supplement.

Registration statement

The filing that makes shares legally sellable to the public — S-1, S-3 and relatives. It creates capacity to sell, not a completed sale.

Regulation SHO

The SEC rules governing short selling, including the locate requirement, close-out obligations for persistent delivery failures, and the alternative uptick rule that restricts short sales after a stock falls 10% or more from the prior close.

Resale registration

A registration statement filed so existing holders can sell shares they already own. The company receives nothing and no new shares are created — but previously restricted stock becomes freely tradable, so float can jump dramatically with no press release. Identify it by the phrase “selling stockholders” and a use-of-proceeds section stating the company will not receive proceeds.

Reverse split

Consolidating shares — a 1-for-20 turns twenty shares into one and multiplies the price by twenty. It changes nothing about the business. In small caps it is most often done to regain compliance with a $1.00 minimum bid price, and frequently precedes a capital raise.

See also: Reverse split calculator

Rule 144

The rule providing a safe harbour for reselling restricted securities, subject to holding periods and, for affiliates, volume limits.

S-1

The general-purpose registration form. Can be a primary offering, where the company sells new shares and receives the money, or a resale registration, where it does not. The distinction is the most important thing on the cover page.

S-3

A streamlined registration form for eligible companies, enabling shelf registration. Subject to the baby shelf rule below $75 million of public float.

S-8

Registers shares for employee benefit plans. Effective immediately on filing, and historically misused by shell companies to issue freely tradable stock to purported consultants. A large S-8 at a company with a handful of employees is not routine.

424B5

A prospectus supplement filed under an existing shelf registration. In small caps this is the classic dilution filing — a registered direct offering, a public offering, or the establishment of an ATM programme.

Shelf registration

Registering an amount of securities now to sell in portions later, without a new registration each time. Combined with an ATM sales agreement, it lets a company sell into the market continuously at its discretion.

Short interest

Shares sold short and not yet covered. Reported to FINRA twice a month and published on a lag of roughly a week to ten days — so the figure on your screen describes a position from one to three weeks ago. It can legitimately exceed 100% of float, because the same share can be lent more than once.

Short squeeze

A rise driven by short sellers being forced to buy back, which is price-insensitive buying that pushes the price higher still. Requires meaningful short interest, low available float, high days to cover, expensive borrow and a catalyst. Most heavily shorted stocks never squeeze — they are heavily shorted because the bear case is right.

Slippage

The difference between the price you expected and the price you got. A stop order becomes a market order when triggered, so in a thin book the fill can be materially below the trigger.

Stop order

An instruction to sell once a price is reached, at which point it becomes a market order. It is a plan, not a guarantee: it cannot execute during a halt and it does not protect against overnight gaps.

Stop-limit order

A stop that becomes a limit order rather than a market order. It avoids a terrible fill but introduces a worse risk — in a fast decline it may not fill at all, leaving you holding the position you meant to exit.

T+1 settlement

US equity trades settle one business day after the trade. It governs when sale proceeds become reusable in a cash account.

Threshold securities list

A daily exchange-published list of securities with persistent failures to deliver above a specified level for five consecutive settlement days. In small caps it often reflects scarce borrow.

Underwriter

The bank that purchases securities from an issuer to resell them, taking the placement risk and a fee. In small caps, deals are more often done on a best-efforts basis by a placement agent.

Unregistered sale (8-K Item 3.02)

Disclosure that the company issued shares privately without registration. It is dilution that has already happened, and one of the three highest-signal 8-K item numbers.

Utilisation rate

The proportion of lendable inventory currently out on loan. High utilisation with a high fee means lendable supply is scarce.

Variable rate convertible

A convertible security whose conversion price is set at a discount to a trailing market price rather than fixed. The lower the stock goes, the more shares the holder receives. A single static dilution calculation cannot capture the feedback loop; model it at several successively lower prices.

Dollar volume

Price times share volume — the correct unit for judging liquidity. Two million shares a day at nine cents is $180,000 of daily turnover, not liquidity, however large the share count looks.

Warrant

A right to buy shares at a set price for a set period, usually attached to a financing as a sweetener. Warrants are future dilution that arrives precisely when the stock recovers above the exercise price — which is why heavily warranted stocks often stall at a particular level.

Warrant coverage

The number of warrants attached per share sold, expressed as a percentage. Fifty percent coverage on a ten-million-share deal means five million warrants on top of the ten million shares.

Wash sale

A US tax rule disallowing a loss deduction when you buy a substantially identical security within 30 days before or after realising the loss. Relevant for anyone trading the same ticker repeatedly. Consult a tax professional — this is not tax advice.