Momentum investing is an investment approach that emphasizes buying stocks whose share prices are rising, with the expectation that the price will continue to move higher.
What is momentum investing?
Momentum bucks traditional investing principles, yet research supports its merit. Many investing styles seek to exploit businesses that the market hasn’t properly valued, but momentum investors want what the market already considers strong--most often reflected in a rising price.
Investors can gauge momentum differently by looking at varying timeframes. Managers sometimes also exclude the most recent month’s performance. Momentum can also apply to an index or asset class, not just an individual stock.
There’s also relative and absolute momentum. Relative momentum compares securities against peers to identify the strongest performers. Absolute momentum identifies one security’s inclination for momentum in isolation.