There are all kinds of traders. There are contrarians who move in the opposite direction as the rest of the herd, buying when others are selling, selling when others are buying. There are momentum investors who track volume and market interest looking for triggers that a stock is about to bust a move.

There are fundamental investors who study annual reports and go over the prospectus with a magnifying glass, technical investors who rely solely on charts, and variations on a theme.

Is one of these investment styles more effective with micro- and small-cap investing?

No. The fact is, each investment style has attributes and limitations. And why limit your analysis to one investment style? It’s the combination of technical and fundamental analysis and knowledge of market signs that create successful investors.

So, when I conduct an analysis of a stock – any stock – I look at that possible buy from every angle. And each angle provides another piece of the puzzle. If you don’t do the heavy-lifting research and analysis, you’re gambling. If you make confident choices based on a detailed analysis you’re investing.

So, when I first hear about a potential addition to the Confident Trader Portfolio, through one source or another, I begin a methodical process of vetting the company, its prospects and its current place both in its market sector as well as its position in stock markets.

Here are just some of the things to look for during your stock analysis:

I think this is a good barometer of a stock’s movement in the near future.

I look for a couple of indicators of market interest. The first is daily volume. Is it moving in a consistent pattern to the upside? That means traders are active and share price will move. Thinly traded stocks may be fiscally sound but without market interest they tend to stagnate within a narrow trading range.

Another indicator of market interest is the number of brokerages “following” the stock. These brokerage houses add and drop companies from watch lists daily. If a company is on the watch lists of a half-dozen brokerages, it gets air time, ink and attention. That’s an excellent indicator of market interest.

I also examine institutional buyers. I like institutional buyers. They provide a little comfort, a little reassurance. They also are the primary driver of price in the early stages of a stocks rise. If national and global banks, mutual funds and other large-block investors hold a few million shares of a potential buy, that’s a big plus and an undeniable sign of market interest.

Somewhat related to market interest but more easily quantifiable.

Companies may be widely traded but still remain within a narrow trading range. So, not only do I look for overall market interest and trading days in excess of 500K daily, I want to see increased volume as share price is climbing. It happens and you can go along for the ride – for a while.

Momentum buys are always shorter term and require more monitoring. A stock will rise in price, reach critical mass and implode, dropping 100% in two hours. It happens. So, if you can spot upward momentum through analysis of share volume and share price, you can be nimble, get in, enjoy a 20% increase and get out in three months.

The key is to know when to sell, and greed – a human emotion – often undermines this investment strategy as the investor watches the stock fall back, thinking all the time that it’s going to turn around.

If you find a momentum stock, track it carefully and be prepared to lock in profits over the short term. These investments don’t last forever.

Company and Market Activity

You’ll find this information in the company’s prospectus and on the world wide web.

I look for companies that solve problems. I don’t think I’d invest heavily in an IPO for a tanning salon chain because people don’t need this service and it’s one of the first things cut from the personal budget when money is tight.

Instead, I look for companies that sell to needs-driven end users. So consider the need for a companies products by comparing other companies in that market space.

Also, look for capital re-investment. If the company is generating capital, much of that excess should be plowed back into the business at this nascent stage of company growth. Look for things like products in the pipeline, branching into new markets (overseas markets are a possible signal of impending growth – another piece of the puzzle).

Small and micro-cap companies in highly-competitive industries – computer chips, for example – must have a unique positioning statement – something that clearly sets the company apart by making it (whatever “it” is) faster, cheaper, more productive, less cumbersome – something that no other company has at the moment. In competitive markets dominated by big players, it’s sometimes difficult to get attention for a company building chips for washing machines.

Perhaps the tool upon which I most rely is the company’s chart. Why?

Share price and entire markets move at three different speeds: daily trends, short-term trends and long-term. Charts provide a visual tool that enables me (and you) to assess a great deal of information and put that information to work for ourselves. You may read the company financials and not understand word one. But you can look at a chart and get an immediate idea of how that stock is trending.

Further, markets and individual share prices move in patterns – patterns that repeat themselves, sometimes many times. For example, a chart will immediately identify resistance and support levels. Stocks that are “range-bound” remain in this well-established trading range.

This gives you an advantage. In reading a company chart, you can quickly tell whether the share price is trading near the highs or lows of its trading range. You can also determine trading volume at various stages of the stock’s up and down movements. The chart quickly reveals that when volume increases over a couple of weeks, there’s a strong sell-off as the share price reaches its resistance level.

I use charts to: (1) identify trends, (2) determine historical trading ranges and (3) as an indicator of market interest – especially speculative market interest. Increased volume on down days often indicates speculator money – gamblers betting the recent sell-off is temporary.

Only a foolish investor would ignore information about a potential purchase or sale of a stock, and there’s a wealth of information available to the self-directed investor. Share prices of micro-caps, weekly, monthly, annually, 3-year and 5-year charts show the short and long-term market view of the stock.

Use all of the tools available to you and expand your investor perspective. Investors who only employ one approach and one resource are expanding, not limiting, risk.

A good buy is a good buy. Don’t marry yourself to one investment strategy. Only growth investing. Only value investing. Only blue chips or the dogs of the Dow 30. If you only employ one investment strategy and don’t employ all of the tools available to you, you’re only cheating yourself.