Posted in Finance, Accounting and Economics Terms, Total Reads: 105
A contrarian as the name suggests derives its meaning from the word “contra” meaning opposite or against. In finance contrarian is used for a style of investing. A contrarian is an investing style in which the investor chooses to go against the general sentiments or the crowd behaviour of the market. It may be used for both buying the stocks when the market sentiment is to sell or to sell the stock when the market sentiment is to buy.
The contrarian goes against the crowd behaviour of the investor and exploits opportunities from mispricing of the securities. This mispricing leads to profits for the investors.
Working of contrarian form of investing:-
1) When the investors are pessimist about a stock they start selling it which further leads to fall in prices. Sometimes this fall in price lead to under estimating the company’s profit potential .Identifying suck stocks and buying them when their prices are low and selling them when the company’s stock recovers can lead to above average gains.
2) When the investors are optimistic about a stock they start buying it which further leads to increase in prices. Sometimes this increase in price lead to over estimating the company’s profit potential. Identifying such stocks and selling them when their prices are still high can lead to capital gains
Mr X buys companies shares of company ABC co. ltd when the sentiments towards shares were pessimist. He bought 100 shares for 5$ per share .knowing the company has potential to recover and explore more opportunities Mr X keeps the shares for one year and sees the company has started to revive. The companies’ shares have now reached to 20$ per share. Which if Mr X sells now will earn a profit of (20$-5$) =15$ per share.