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Momentum Investing

 

Momentum investing is a stock price timing strategy of purchasing a security while its price movement is on an upward trend. The momentum investor waits and looks for a bullish market, an industry that is timely, companies with very favorable earnings releases, companies that are beating Wall Street analysts’ earnings estimates, and companies whose earnings growth is accelerating. They are also involved with turnaround companies that have already hit bottom and are making solid strides in their recovery. These investors focus on companies and stock prices where all the news is positive. Investors are betting that the stock will beat its previous high.

If any factors affecting the company’s stock price, performance or expectations turn negative, the investor sells immediately.

Momentum players take positions for a few days to a year; they are not “buy and hold” investors. While this technique has been proven to work, and many smart investors use it, they are generally purchasing a high priced security, and are relying on future investors to bid the price up, in order to make a profit. 

Momentum investors utilize timing techniques. Some pay little attention to the actual company and perform limited fundamental analysis; they just follow the upward momentum of the security. It’s not that they don’t want to do a complete check on the company, it’s that they must move fast to buy or sell at the right price. If they stopped to thoroughly research a company, they would have already missed the price opportunity on the stock. I give momentum investors a lot of credit, since they are practicing a technique that is hard to master: timing the stock market. Momentum investors mostly deal with price movements and leading indicators; to a lesser degree, sales, profits and P/E ratios. Momentum investors invest in timely securities.

Today’s TV shows focuses on momentum investing to make crazy and quick money. Some of the young mothers in Japan are making more money trading stocks, using momentum investing techniques, than their husbands are through their regular jobs. Momentum investing is a profitable and popular investment/trading tool used by many seasoned professionals.

 

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