Definition
Momentum Investing
Momentum investing buys stocks that have been rising strongly, on the premise that recent winners tend to keep winning in the near term.
Momentum strategies rank stocks by recent price performance (say 3-12 month returns) and buy the strongest, riding the trend until it weakens. The approach relies on behavioural patterns, herding and delayed reaction to news, rather than valuation.
India now has momentum-based indices and smart-beta funds (like Nifty200 Momentum 30). Momentum can deliver strong runs but suffers sharp reversals during market turns, so disciplined exit rules and trailing stop losses are essential.
Related terms
- Contrarian InvestingContrarian investing means going against the crowd, buying what others are fearfully selling and selling what others are greedily buying.
- Trailing Stop LossA trailing stop loss is a stop order that automatically moves up as the price rises, locking in profits while still protecting against reversals.
- Moving AverageA moving average smooths price data over a set period to reveal the underlying trend.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.