The stock market is generally seen as a very risky investment. When you see past disasters (such as the Great Depression), you may hesitate before putting your faith and money into the economy. But there are some ventures, however, that can still prove to be very safe in terms on return on investment. One such venture is via momentum stocks.
Theory of Momentum Stocks: Momentum stocks are generally regarded as safe investments- since trading is based on past performances of a certain stock or security. The basic idea is to buy stocks that have had high returns over three to twelve months, and sell those that don't perform so well.
Some of these investments can be explained via seasonal activity. If a stock plummets at the end of the year, investors like to sell them for tax reasons. This means that buyers will enjoy a deflated cost, which is sure to rise again in the coming months under normal circumstances.
Some critics say that the risk to momentum stocks is actually high compared to some other more docile forms of investment. In some respects, critics may be right. But under a watchful eye, momentum stocks are generally fairly stable if proper research has been done. One thing critics do note is that returns on momentum stocks are higher than other investment options- making even high risk situations possibly worth a gamble.
Rewriting the Norms in Stock Market Trading: The most common theoretical practice in stock market trading is to buy low and sell high. This will ensure that costs are minimal, while profits are at their maximum. This is true, but there is still reason to believe that this commonly held belief isn't as widely renown as previously thought.
Momentum investors believe that buying high and selling higher is a better idea. Although this takes more resources, generally the payoff is almost guaranteed. There are lesser short term payouts to be had in this instance, so beginning investors usually shy away from this practice.
One key ingredient to exploiting the buy high and sell higher theory deals with psychology and sociology. Since most investors stick to the buy low sell high principle, there are far more investors that pool their resources into smaller companies. This makes the powerful conglomerates and corporations much more stable as a result, since there is less trading being conducted. Where there are lesser trades, there is more stability in general.
Lastly, understanding how conglomerates work will empower many buy high, sell higher enthusiasts to make a nice chunk of money. Since conglomerates commonly take other companies over as time progresses, their stocks increase exponentially as this occurs. Investing in a conglomerate, therefore, is generally accepted as a stable investment- albeit there are exceptions. While there is less return on investment in some cases, those who can afford to purchase a large number of stocks will enjoy momentum trading.
Final Thoughts on Momentum Trading
Momentum trading isn't always as risky as the critics will tell you. On the contrary- it is a very stable stock trading practice if the proper research is done. Track a few companies to see how they perform over a few months time, and invest in the ones that show promising results. Be sure to give the poorly performing companies the cold shoulder- they won't conform to the momentum trading policy that present day momentum traders hold.
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