Momentum stock investing is an investment strategy adopted by investors who try to monetize the momentum of an existing trend in the market. Momentum stock investors buy stock with upward price movement and sell ones with downward price movement. This investing method encourages going with the current trend which is in shear contrast with the Wall Street ideology of ‘purchase low and sell high.’ Richard Driehaus made this strategy popular and also known as the father of momentum stock trading.
The basic assumption for this strategy is that the stock that have 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 a 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 market, this method believes the opposite. It believes in making profit via longevity of the stock prices. It is also a time consuming method as the 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 price movements. It may also reduce your net profit due to the turnover fees and commissions involved.