If you’ve ever heard someone say “the trend is your friend,” they’re talking about the power of momentum. In stock investing, momentum helps you pick stocks that have been doing well and are expected to continue the trend in the near future. 

If you’re using Share.Market’s factor analysis tool, it is important to understand the momentum factor for making informed decisions. In this article, let’s break down what momentum means, how the score is calculated, and how to use it so you can invest with more confidence.

What is the Momentum Factor?

Let’s say you’re watching two cricket players. One has been hitting sixes for the past few matches, while the other hasn’t scored in ages. If you had to bet on the next boundary, you’d probably go with the one in top form, right? That’s momentum in action!

In stock market terms, the momentum factor measures whether a stock’s recent performance is likely to go in the same direction. Stocks with high momentum have a track record of delivering strong returns over recent weeks, months, or even the past year. 

So, winning stocks often keep winning, while underperformers often keep losing. It is based on the fact that the reasons that cause a company’s recent out/underperformance are expected to persist in the near future. 

By using the momentum factor, you’re looking for companies whose prices have been rising steadily in the recent past, because these stocks are statistically more likely to keep rising, at least in the short to medium term.

How Does Share.Market Calculate the Momentum Score?

Share.Market’s factor analysis tool makes it super easy to spot stocks with high momentum. Here’s how it works:

  • Look at Recent Returns: Share.Market examines a stock’s percentage returns over multiple time frames, like the past 1 week, 1 month, 3 months, 6 months, etc.
  • Give a Momentum Score: The tool assigns a score out of 5 based on comparison with other listed stocks.

How Should You Use the Momentum Score?

Here’s how you can use the momentum score: 

1. Find the Winners

If you love the idea of jumping onto trends before everyone else does, focus on stocks with a high momentum score of 4/5 or 5/5. These stocks are attracting investor attention, and positive news or earnings can quickly push prices even higher.

2. Avoid the Underperformers

Stocks with low momentum scores are often underperformers. If most time periods show losses or weak returns, these may stay stuck or even fall further unless something big changes. It’s often smarter to avoid underperforming stocks unless you have strong reasons to think they’ll bounce back. 

3. Balance Your Portfolio

Momentum isn’t the only thing that matters, and you shouldn’t let it blind you to other important factors. Combine momentum scores with other factors, like value, quality, volatility, and sentiment, to build a balanced portfolio of stocks that fit both your growth and safety goals.

4. Check Back Regularly

Momentum can change quickly. A stock leading today might become an underperformer in the next quarter. That’s why it’s good practice to revisit the score often, especially if you’re actively managing your portfolio.

Why Does Momentum Work?

Momentum is based on real market psychology. When investors see a stock going up, more people want in, which pushes the price even higher. This self-reinforcing loop can last weeks or even months. Moreover, this pattern has held true around the world. 

But you should remember that no trend goes up forever. Prices can reverse just as quickly if the company stumbles. Make sure that you consider all other factors before making any decision. 

Conclusion

With Share.Market’s momentum score, you don’t need to guess which stocks are doing well, as you get clear, comparable numbers up front. Just keep in mind: while it’s fun to invest in a winning stock, mixing in other factors like value and quality will help you stay balanced and smarter as an investor. 

So, the next time you’re scanning for your next stock pick, peek at the momentum score, your shortcut to spotting the market’s favourites in real time. Happy investing! 

FAQs

1. Is a High Momentum Score Always Good?

Not always, it’s great for catching trends, but high-momentum stocks can reverse suddenly. You should always check other factors like quality and value before investing.

2. How Often Do Momentum Scores Change?

Quite often! As stock prices and market conditions change, so does the momentum score. It’s a good idea to check scores regularly before making new trades.

3. Can I Use Momentum for Long-Term Investment?

Momentum works best for short- to medium-term trends. For very long-term plays, you should balance momentum with quality and value factors for safety.

4. Do High-Momentum Stocks Mean More Risk?

Sometimes. Stocks rising too quickly can be more volatile, so only invest as much as you’re willing to risk.