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?

Asset allocation is the process of working to be patient and still make money with your investment strategy. Warren Buffet said “The stock market serves as a relocation center at which money is moved from the active to the patient”. In the movie “Cars”, Lightning McQeen had to learn how to be a little patient and how to make his speed work for him. Doc taught him this with the lesson of how to drive in dirt. This is similar to what needs to be done with an asset allocation approach. The investor will want to purchase stock in a number of different growing companies that will diversify his investment. This will serve to provide a controlled speedy return with minimal risk.

There have been many different articles and debate on asset allocation. There are many different mixes that can be considered with this investment style. The most common one is the equity/bond mix. However, there is also the domestic/international equity mix, the nominal/inflation-adjusted mix of bonds, or what mix of indexed funds or market capitalization weights should be used. The proper mix of efficient tax free funds is also a consideration.

There are asset allocation calculators available that will help you to determine an optimum mix of asset investments to have both high returns and a minimal amount of risk. Warren Buffet also is reported to have said, “Risk comes from not knowing what you are doing.” It may be a good idea to talk to a stock broker, or to use the asset allocation calculators to arrive at what makes sense for you with your goals and risk aversion.

One of the problems with the asset allocation calculators is that they are using previous statistical data. It may be that things have changed with the stocks dynamics. This may cause a false reading on your optimum asset allocation. There are some theories that asset allocation using old data is a waste of time. I do not feel that this is the case. I think that a person can use what feels right for them, and determine an investment mix that works for them. This investment mix can be tweaked over time. Whatever mix an investor arrives at, it should definitely be rebalanced on an annual basis to maintain the original mix. Rebalancing is the process of selling the stocks that have done well and purchasing additional quantities of stocks that have lagged. This strategy serves to allow the investor to make money by buying low and selling high.

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.

Investing in large cap stocks is a smart thing to do for the proper diversification of your stock portfolio. Harry S. Dent, Jr., an economist, stated that “The best time to buy large cap stocks is at the beginning of a growth boom. The race for market leadership favors large companies.” You should invest in large cap stocks for two reasons. The first reason is because they are more stable stocks. Their revenue and profit will not be as volatile as the small cap stocks. The second reason is that it is a smart thing to do if you feel that the economy is entering a growth period.

Large cap stocks, by definition are those stocks with market capitalization above five billion dollars. In order for a company to reach this pinnacle, they will have to have been around for a long time, and have shown the ability to weather a number of economic cycles. They have shown by this stability the reason that an investor should have them in their portfolio. Placing a portion of your investment in large cap stocks will also help with your asset allocation. They help to stabilize your investment.

On December 22, 2009 an article by the Fidelity Management & Research company stated their expected outlook for the market, and they discussed which asset classes an investor should have their money in. They indicated that “at this point in a recovery period that performance patterns among market-cap sizes have typically become less distinguishable. As a result, owning some exposure to all market cap sizes remains an effective way to diversify the equity allocation within a portfolio.”

In relation to large cap stocks, they indicated that with the large cap company ability to raise capital globally, they are positioned better to take advantage of opportunities that may present themselves in the immediate future. They also stated however, that the large cap companies may have a hard time initiating large returns due to their defensive natures.

If you want to have a properly diversified portfolio, and wish to position yourself to take advantage of the economic growth, I would suggest that you look into slowly increasing your percentage of large cap stocks in your asset allocation.

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.

President Lincoln once said that if he had eight hours to chop down a tree, he would spend seven of it sharpening his saw.  With stock market trading, your diversification allocation is an important strategy to make your investments successful.  The question then is concerning what asset classes to choose, what percentage of your investment goes in each class and what sectors and stocks do you put your investments in for each asset class.

This is probably the most important decision you will make as far as your investment strategy.  Therefore, as President Lincoln advised, do not short your time with this question.  Spend some time looking at the asset classes and their expected return and the standard deviation.  Use an asset allocation calculator which is available online to plot your ideas and see how they fit together.  One example of a calculator can be found at http://www.dinkytown.net/java/AssetAllocator.html.  It allows for input on your current situation and gives a possible start on an allocation formula.  Another site that helps determine asset correlation that is really good is at  http://www.assetcorrelation.com/user/enter_custom_port.

Stock diversification is important because if you have all your investments in like kind asset classes, if the asset class or particular sectors within that asset class has a bad period of time, your entire investment has a bad period of time.  One definition I cam across said that  diversification is the process of spreading your money among different investments to reduce risk.  By picking the right group of investments, you may be able to limit your losses or enhance your gains.

That is certainly the rub.  What group of investments do you select.  After checking their credentials, a financial planner or stock advisor may be a good person to check with.  They can give you advice as to how to begin.  You can plug their ideas in the asset allocation calculator and check if it fits your strategy.  Your strategy will certainly be finessed over a period of time as you test your theories.  This is not bad.  As stated in another area, you can test your theories with play investment sites before you enact it for real with your money.

One analysis I read about suggested putting a portion of your investment in commodities and real estate investment trusts (REIT’s).  The argument is that even though these asset classes are volatile, they will go a long way toward diversifying your portfolio.  Another book I read said that if you invest in REIT’s, than move a portion of your small cap funds to that asset class.  That is an idea you would need to look at and see if it fits your strategy.  Certainly, commodities are a little riskier and volatile.  When the market is down, people move toward them.  However if the dollar strengthens and the market improves, these suffer.

The advice then, is to take your time initially.  Sharpen your saw and determine the correct strategy and mix for you.  Then stick with the system.  You did your homework up front, then trust your system.

Investing in anything other than money market or certificate of deposits will carry a measure of risk. Oftentimes we think of risk in a negative fashion. Risk, however, can be a favorable thing. It is due to the element of risk that our investments can earn a higher return than what can be obtained in money market accounts. If we review our investment strategy and minimize our risk while maximizing our return, we win. Since winning is what we want to do, then we should study and learn all we can about accomplishing that task.

Risk can be thought of as a deviation from the expected norm. If after analyzing an investment, we expect it to generate a 10% return. Risk would be the quantified number that would express the probability that we would not get the 10% return. There is a number that can be obtained that helps us to determine that probability. It is a number used in statistics and is called the standard deviation. It is possible to think of standard deviation in terms of the success we could have in getting the 10% return. The standard deviation can be thought of in terms of a bell curve. One standard deviation means that there is up to a 67% chance that the return will be within one standard deviation of the norm.

Lets say that the expected return is 10% and the standard deviation is 5%. That means there is a 67% chance the actual return will be between 5% and 15%. To make the odds more meaningful, we can add another standard deviation. Two standard deviations gives a probability of a 95% chance of occurrence. So in the example above, there is a 95% chance the return will be between 0 and 20%. So, it is a good investment rule to evaluate the expected return and what the standard deviation is for that stock.

Another method to reduce risk is to start small. Many of us do not start out with a large portfolio to work with. You should never invest more than 3% of your portfolio in one stock. If you have a small trading account, then trade small.

Longevity is the key to being a consistently successful trader. If you are risking 25% of your portfolio on one trade, you are setting yourself up for trouble. Invest small and increase the size of your portfolio through winning. As you win more and more, you will be able to increase your initial investments. After all, 10% gain of $1000 is still 10%. It does not need to be a large investment to obtain a gain.

Setting your financial goals and strategies is another method to manage your financial risk. Knowing what you want to accomplish will help you to avoid getting in over your head. Too many times, we find that stock that is going to hit the home run. It is too pricey for our strategy and does not fit our portfolio goals, but by golly, our friend says it is a winner. Run do not walk from that thinking. Have a goal, stick with it and you will watch your investment grow. Remember, the tortoise crossed the finish line ahead of the rabbit.

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

Before you begin any journey, you need to determine where you are going and how you will get there. You also need to determine the vehicle you will use and how long it will take to get there. Getting to your determined financial destination is the same way. Before beginning this journey, you need to sit down and do some planning. Too many people think they want to invest in the stock market before deciding what they want to accomplish. They end up chasing various stock tips or ideas and getting nowhere. This is similar to just getting into a car and merely driving without a destination in mind. You may go somewhere but in the end, it may not be where you really wanted to go.

The first investment goal is to get out of debt. You may have high credit card debt that is costing you over 18% per year. Investing in a stock fund that pays 10% does not make sense in this situation. Also, you need to invest in a savings plan. You really need to have a financial cushion of 3 – 6 months of savings to cover unexpected expenses. You would hate to have to sell some stock to cover the purchase of an unexpected expense

You then need to determine your short term, medium term and long term goals. You should really have some idea of what you desire in each financial category. Pat Swanson, a Certified Financial Planner and families’ specialist with Iowa State University (ISU), states that “Individuals spend more time planning a summer vacation than they do setting investment goals”.

For example, a short term goal may be a family vacation for the next summer. This will probably require some savings but it should be put into a short term vehicle such as a 6 month certificate of deposit (CD). What I have done is set up three 3 month CD’s. I have one maturing every month. They are also the type I can continue to invest in. That way I can put money away every month and have one maturing each month in case I need the money. The interest rate is lower but it is okay for meeting short term goals.

Saving for a home or a major purchase may be a medium range goal. This may be 3 – 4 years in the future. This can be accomplished by longer range investments such as Bonds, or longer range CD’s. Once again, it is important to realize that if you have invested in the stock market, the stock market may be on a downward swing when you need the money. Therefore, a different vehicle is needed for this type of goal.

Long range goals such as retirement or saving for your children’s, grandchildren’s education are examples of long term goals depending on your age. If your expected retirement is only 5 to 6 years away, this may be considered a medium range goal. However, if it is further, you can consider investing in a higher risk, but expected higher return, investment tool such as the stock market.

You should write each of your goals down. Remember, a “goal not written is only a wish”. You should think about your goals often and visualize how you will feel when they are accomplished. This helps to make the goal real in your mind. You should also not establish conflicting goals. Make them reasonable. Also remember your goals should be Specific, Measurable, Attainable, Reviewed, and Time related (SMART).

A specific goal is one with dollar amounts and dates established for an identified purpose. Make regular deposits into your financial vehicle and be consistent. Reward yourself with some short term attainable goals. It feels good to have accomplished a goal and helps you have the realization that the longer term goals are possible.

If you decide to invest in the stock market, remember it will take some research. You probably invested a considerable amount of time to prepare for your career. Be willing to invest some time in your financial goal career. Do some research read up on different investments including the risk each one carries.

Also remember your investing goals will probably change over time so you should reassess them at least annually. Are you on track or has something changed to require updating your investment priorities. Perhaps a major event has happened that causes you to rethink what you need in life.

Have fun with your goals. This can be a fun time. It is exciting to have a dream and reach it. Remember that life is more than just reaching the final destination, it is having fun along the way.

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.

Deciding on your investment time horizon or time line is a crucial step in determining your investment strategy. Your time horizon is the time from when you begin an investment strategy and when you need the money.  For example, if you were saving for a home and wanted to move in after 3 years, your time horizon would be 3 years.

Knowing your time horizon is crucial because you need to know how aggressive you can be with your investments. All things being equal, you can be more aggressive with a longer time horizon.  There are specific strategies and asset classes that make sense for each investor’s time horizon and that should guide you in the decisions you make.

Time diversification or remaining invested through several market cycles helps you to reduce the risk involved with investing.  Time diversification is especially useful with stock investments where in the short term, there may be both up and down swings.  Time diversification helps to smooth out those swings.

Because you can reduce some of the risks through time diversification, a longer investing time period allows you  to take on greater risks and thus benefit from a higher return on your investment.  With a shorter time period you will not be able to diversify over several market cycles, so you will need to settle for lower risk, lower return investments.

To make the most of time diversification it is important to remain invested over more than one market cycle.  A market cycle is a period of time of at least five years.  If you can invest in more than two or three market cycles, the opportunities open up.

For instance, with a time period of 2 – 3 years, you should probably invest in money market or certificate of deposits.  For a time period of 4 – 8 years, you can probably invest in government or corporate bonds or even some high value stocks which are known to consistently pay dividends.  For greater than 8 years you can probably invest more in small company or growth stocks.

If you are establishing a goal for retirement, you need to remember that with retirement goals, depending on your age, you are probably investing on an extensive time horizon.  However, with this goal, you need to realize that you really have two time horizons.  You have the time horizon which goes to your retirement age, but then there is the time horizon from retirement to death.  Many people are living into their ninety’s now, so you should really plan accordingly.  You should still plan on some aggressive investments even after your retirement.

Another thing to remember is that as time progresses, your time horizon shrinks for your goals.  A time horizon of 8 years after a period of 4 years now becomes a short term time horizon.  You will need to constantly evaluate your time horizons and plan accordingly.

Identifying your risk tolerance and time horizon helps to set your investment strategy.  Your strategy will help you decide how much of your portfolio is going to be invested in bonds, stocks, and stable value and money market funds.  This is known as asset allocation and is discussed in another lesson.

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.