As a new investor, you may have confused about the best time to purchase a stock. Should you buy it when the price is heating up or should you wait for it to cool off. There is conventional wisdom for each of the wisdom. When you decide to buy the stocks when they are in the good run, then, that is a momentum investing.
Many believe that momentum investing can bring long-term profits. Investors usually sell this type of stock after they got a long bad stretch.
Often time, investors identify this type of stock by looking at it three to 12 months of return history. If they find the stock have had high returns for that period of time, then, they will use the momentum investing approach.
After some time, if they witness the stocks become underperformed, then they will sell the stock.
Ricard Driehaus, a Chicago-based money manager, is known as the one who introduced this approach.
The wisdom behind momentum investing
There is no consensus saying that this approach is a valid strategy. However, according to the Journal of Finance, there were a massive number of investors used this approach back in 1993. Up to now, there is no clear explanation about how this approach can bring huge profits, but it does make people gain significant profit.
The approach is essentially the opposite of the old wisdom saying that in investing we have to sell high and buy low.
But with this approach, an investor can get high returns in a period of time after they bought the stocks. Thus, it is safe for them to sell it back at a slightly lower price.
Following a momentum investing approach
One of the major disadvantages of this approach is that it requires a great deal of work. Sadly, not all investors have a sufficient amount of time, energy and expertise to find the stocks which have been in a good run.
This approach, indeed, involves complex technical indicators to know the best time to sell and buy.
However, you should not worry, if you are still interested in this approach, there are some securities that follow this approach. They can help you do the momentum investing.
