What About Momentum Investing?
Momentum investing focuses on growth in the stock price in other words, instead of selling the best-performing assets, the investor buys more of them. The worst-performing assets, on the other hand, are sold off without waiting for them to bounce back from any recent lows. A momentum investor buys stocks that have gone up the most in the recent past, or are making new 52-week highs, and avoids or even sells those that have done badly. Momentum investing and growth investing are frequently confused with one another. However, while they have some similarities, they are two distinct strategies. Growth investing focuses on buying companies that either has strong recent earnings growth or are expected to have in the future. But, they might not be yet in their best shape. Meaning the investor bets on their rise from “insignificance in the market” or from their recovery from bad days. Moving back to momentum investing, some people see momentum investing as just something that had success in a seemingly random event, it is more likely to succeed in the future. The basic assumption for this strategy is that the stock that has ascending values shall continue to do so while the stocks with descending value shall also be doing the same. This strategy believes that it is highly probable for stock to follow the trend rather than move against the trend. Momentum investing aims to make use of the volatility in the market. The investors invest in the stocks with soaring prices and sell them as soon as they predict the reversal in the prices. Momentum trading is an interesting and attractive option for traders. It can be profitable with good returns at times but the associated risk is also pretty high. While most of the investment methods believe in making the use of uncertainty in the market, this method believes the opposite. It believes in making a profit via longevity of the stock prices. It is also a time-consuming method as constant monitoring is essential to identify and quickly react to any price movement in the opposite direction. Momentum investing is more profitable when prices are moving upwards by giving you an opportunity to capitalize on price movements. It may also reduce your net profit due to the turnover fees and commissions involved.
Perhaps the two most often cited reasons for why an investor is likely to avoid a momentum-based security selection approach are that 1. Stocks that have been going up for a while (or down) are “overvalued” (or “undervalued), and 2. Stocks that have been going up for a while (or down) are more susceptible to reversals. All in all, momentum investing is all too often perceived as being “too risky” for consideration. The approach has also been blamed for encouraging stock market bubbles, as investors buy into rising shares in order to get ahead of future price rises. A momentum-based strategy sometimes too risky. The Investor should take the time to read about it and historical studies that support this investment approach so the Investor may uncover its nuances and drawback and ultimately determine if it is appropriate for the Investor.