The Momentum Effect

The Momentum Effect refers to the tendency of assets, like stocks, to continue performing well or poorly over time. If a stock has been rising, it often keeps rising for a while; if it’s been falling, it tends to keep falling. This behavior is driven by investor psychology and market dynamics, as people often follow trends rather than fundamentals. Consequently, momentum strategies in investing involve buying rising stocks and selling falling ones, based on the belief that these trends will persist in the short term. It's a key concept in understanding market movements and investment strategies.