Many of our readers may have heard about Momentum investing. When analyzing the stock market, one can always find stocks that move up more than others on any given day. These stocks can be thought of as having positive momentum and can go higher. The idea of momentum investing is to find stocks that tend to move higher and ride those stocks until they no longer move. A real life comparison may help here.
Let us imagine you want to go from place A to place B – There are two choices:
#1 can be compared to investing in the stock market and #2 can be compared to investing in momentum stocks. In #2 you are riding express trains that get you to your destination faster. Mapping it to stock market jargon – Momentum investing has the potential to produce returns that are better than investing in the overall stock market via an Index fund such as S&P 500/NIFTY 500 ETF/Mutual Fund.
All investments are subject to risk (except Govt issued bonds) and so is momentum investing. There are certain characteristics in momentum investing which are advantageous while there are other characteristics that are disadvantageous. In general, if you are an investor that would like to follow the stock market closely and want to achieve excess returns beyond what the stock market offers by focusing on a set of stocks, Momentum investing will be of interest to you.
