momentum investing
An investment strategy that buys securities showing upward price trends and sells those in downtrends, based on the tendency for trends to continue.
Example
“The momentum investor bought the 10 strongest performers from last quarter, rotating into the new winners each quarter.”
Memory Tip
MOMENTUM investing = buy what's going UP, sell what's going DOWN. Trend is your friend.
Why It Matters
Momentum investing can help you capitalize on market trends and potentially generate strong returns during bull markets. Understanding this strategy is important because it represents a popular approach that many investors and fund managers use, which can influence overall market movements and affect your portfolio performance.
Common Misconception
Many people mistakenly believe that momentum investing is the same as buying low and selling high, but it actually does the opposite by buying securities that are already rising. This confusion leads some investors to think momentum investing is about finding undervalued stocks when it is really about riding existing price trends.
In Practice
Suppose a stock rises from 50 dollars to 75 dollars over three months showing strong upward momentum. A momentum investor would buy at 75 dollars expecting the trend to continue, then sell when the price reaches 95 dollars. However, if the trend reverses and the stock falls to 60 dollars, the momentum investor would sell to cut losses and move to other stocks showing positive trends.
Etymology
MOMENTUM (continuing force of movement) INVESTING. Investing based on the MOMENTUM (trend continuation) of prices.
Common Misspellings
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Related Terms
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