ANSWERS: 1
  • A momentum stock trader in the financial markets hunts upward trends in individual securities. This trading strategy is often adhered to during positive market cycles and is less effective when the stock market is undergoing a period of declines.

    Identification

    Momentum stock traders often take on exorbitant amounts of risk. These traders are in search of stocks that outperform during even the best of times in the stock market, and will often only consider stocks that can generate double- or triple-digit returns in a matter of months, according to MSN Money.

    Features

    Despite the ambitious expectations of momentum traders, there is a strategy involved. Traders hunt stocks with rising historical price charts, short-term profit growth and securities with expectations for future profitability.

    Time Frame

    Unlike buy-and-hold investors, momentum traders do not hold onto investments for long periods of time. Instead, these traders invest to generate a short-term profit and sell a security within months or less.

    Risk

    Momentum traders often invest in high-priced stocks that they expect will soar even further. In the event that these investments reverse direction, the losses experienced by a momentum trader can be severe.

    Tech Bubble

    Momentum trading was trendy during the technology boom of the late 1990s. Dozens of Internet stocks were trading at unjustified lofty prices without having generated any profits. Momentum investors purchased these stocks in hopes of profiting from future gains, although that bubble eventually burst in 2000.

    Source:

    MSN Money: A Simple Way to Tap Market's Momentum

    More Information:

    McGladrey & Pullen: Momentum Investing Works Until It No Longer Works

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