Momentum investing

Momentum investors buy stocks that have 'momentum'. In other words, they invest in companies that are improving at a faster rate than the market or than the market currently expects. Their strategy is based on the expectation that, although the stock price is already high, further good news will push it higher.

Momentum investors also look for average companies or even good companies that are in the process of becoming much better. It is in this transition that momentum investors make their money.

The risks of momentum investing

You may have heard the phrase 'buy low, sell high'. In contrast, momentum investors buy high and sell higher, and risk losing more money than investors who buy undervalued stock. Therefore, although momentum investing may generate profits in the short term, it is a low-return, high-risk strategy in the long term.