Market capitalization is the calculation of the value of a companies stock. It is calculated by multiplying the outstanding shares by the price of the stock. Small cap stocks are generally those stocks with a market capitalization of between 50 million and 500 million dollars. Small cap stock investment is considered a very worthwhile type of investment by many analysts. This is because the small cap companies are considered the type of companies which will be able to move on a moments notice and take advantage of growth opportunities when presented.

There are different studies which indicate that small cap stocks do outperform large cap stocks. However, this must be taken with a grain of salt. At times, large cap stocks do actually outperform small cap stocks. This generally happens when the stock market is coming out of a recession and investors are looking for value stocks. They are a bit worried about what the market is going to do, so they are looking for solid investments that pay dividends. Small cap stocks also do well in periods of high inflation.

While small cap stocks may be out of favor at certain times of the stock market cycle, they may actually be a good investment due to this under appreciation. Buying before others buy is the best time to get the stock cheap. I once heard that the best way to make money on your investments is to get there before anyone else does. This is known as the contrarian viewpoint.

One of the problems with small cap stock investment is the transaction costs. Because the stocks have a low value, the transactions costs will force the investment cost up. The spread between the bid-ask is one of the ways that the transaction costs are higher. Percentage wise, this spread causes the buyer to spend more than he would with a large cap stock. The illiquidity of the small cap stocks will also force the price higher. The volume percentage is simply not there for small cap stocks.

The way to combat this higher cost is to invest for a longer period of time. If you have a longer investment horizon, the cost is spread over that period of time and you are able to make money on your investment. You will also be able to obtain higher returns as the invested company re-invests their profits and obtains a larger growth pattern. In one study which was completed, it was determined that if you invested in small cap stocks and held the investment for at least five years, you definitely beat the large cap stocks.

Another strategy to make money with small cap stocks is to diversify. Small cap stocks tend to be concentrated in a smaller number of sectors. So you need to spread your investment over a larger quantity of stocks to reduce the amount of risk associated with the investment. Another strategy is to make sure you perform the proper amount of due diligence. If you were looking to purchase a company, you would spend the time to dig all through their financial records to determine if they were worth the investment. Why wouldn’t you do the same with your stock purchases?

The current sentiment of the media seems to be nothing but doom and gloom. Many of them are worrying about a double dip recession. They feel that we are just beginning to come out of the recession and are still on the precipice. They feel that any slight push or draft will force us back over the edge, into the deep dark hole of another recession. The stock market and its managers seem to be feeding off of this sentiment.

A true contrarian loves this time of negative sentiment. They are actually optimists at heart who see buying opportunities around every negative corner. Jeff Sommer is the author of The Art of Contrarian Trading. This is a blog devoted to contrarian thinking. In his latest article dated July 6, 2010 he discusses the buying opportunity provided by the current media attack.

Mr. Sommers indicates that one article in The Economist shows a shark cutting through the water on its cover page. The caption talks about the hidden danger in today’s market. Mr. Sommer says that the stock markets 15 percent drop in May, 2010 reinforces the reluctance of the average investor to ‘get back into the water’. He goes on to say that this reluctance is a truly great buying chance for the contrarian investor. If they are not already fully invested in the stock market, and making money, they should certainly do so now. His feeling is that the stock market is merely positioning itself for a sustained climb upward.

There are many articles which support this theory by Mr. Sommers. The author of an article on the Equity Clock states that the markets have been oversold and he feels that they are due for a bounce. He does feel however, that this bounce may be short term leading up to the earnings release period.

This attitude can probably be traced to last quarter’s positive earnings release. If the reporting companies can continue to sustain the growth begun in previous quarters, then I feel you will see the private sentiment to begin to improve. Then the market will continue its upward climb to very profitable heights.

Mr. Sommers also indicated that the option trading is pointing to a bullish sentiment. Initial suggestions indicate a buying signal. His advice is to remain defensive in high quality dividend paying stocks.

So I would suggest that your ought to consider yourself as a contrarian. The best time to buy is when everyone else is selling. This is indicated in Its A Wonderful Life when Mr. Potter tries to buy up the town during the great depression. He certainly saw a buying opportunity when it presented itself.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Contrarian investing is the art of making profits in the stock market by going against the flow. It is similar to what George did in an episode of Seinfeld, do the opposite. If everyone is saying sell, then you buy. Humphrey Neil in The Art of Contrarian Thinking said “When everyone thinks alike, everyone is likely to be wrong.”

Contrarians do not necessarily have a bull or a bear market viewpoint. They are merely attempting to take a different viewpoint from the majority. They seek to buy shares or sell them when the majority of investors appear to be doing the opposite. Some noted contrarians are Warren Buffet who believes that the best time to invest in a stock is when shortsightedness of the market has beaten down the price. There is a mutual fund dedicated to contrarian investing and is called Dogs of the Dow.

A contrarian strategy is to buy sell rated stocks. Then you hold them until their stock price improves and then sell. Sell rated stocks are stocks that have been downgraded by analysts. However, they are usually behind the trend of the market so the market has already beat up the stock price before the downgrade recommendation. Look for consensus opinions on the stock before including it in your list.

Look for short sellers. Short interest is the number of shares that have been borrowed by short-sellers because they expect the price of the stock to go down. The short-interest ratio is a good barometer to use in this analysis. Usually in-favor stocks have a rating of 5 or below so you should look for ratios of 6 or above.

You should definitely stay away from so called penny stocks. There is simply too much risk and volatility with this group of stocks. Look for stocks that have a price of $10.00 or above. If your list does not come up with enough stocks, you can go down to $5.00 but not below that.

Look for large institutional interest. The institutional investors have the manpower and ability to analyze stocks better than you or I. Look for institutional ownership of above 65%. This can be adjusted a little but do not go below 50% ownership. Let the institutional investors drive the price up for you.

MSN’s stockscouter is a good tool to use to evaluate your list of stocks. This tool analyzes a range of fundamental and technical factors and rates the stock. Look for stocks with an 8 or above rating.

The above tactics will develop a working list for you. You can then look the list over and determine if there is some reason for the stock to have gotten beat up that you want to stay away from. Eliminate these stocks from your list. Then do some more homework on your list using other analysis. You can even play your hutches out over some time and determine if this trading system will work for you. Then go for it and buy those shares that everyone else is dumping.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.