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Momentum

In stock trading, momentum is defined by the relationship of a stock's price to its rate of acceleration. The faster the rate of acceleration in the price, the greater the momentum.

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In science, momentum is described as a force and it is determined by mass times velocity. As the theory goes, any object in motion will stay in motion along the prescribed path until another force "acts" on the object, thus changing its path and direction.

In stock trading, momentum is defined by the relationship of a stock's price to its rate of acceleration. The faster the rate of acceleration in the price, the greater the momentum. Many investors will buy a stock simply because it has achieved a certain degree of momentum. They believe that the stock will continue to rise by mere virtue of the fact that it already IS rising. As more people pile into the stock, the rate of acceleration increases and the stock takes off. Not a bad deal if you can identify some winners, right? Not so fast.

The thing about momentum is that you never know when some other "force" is going to act on your stock. It may be a number of things, including loss of interest because the stock hits people's exit points, or bad news.

Momentum investors have no desire to hold stocks that don't have momentum. So, when a stock slows down or starts to fall, they generally jump ship and cause it to race more quickly on the downside. As you start to see, playing the momentum game is a double-edged sword. One thing's for sure, though--the vicious force on the downside is much worse than the ride on the upside as everyone will try and sell at once.

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