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People create a trend in the equity market based on shared opinions. A common belief may sweep over demography forcing them to make investment decisions based only on faith, not facts. It can make a mediocre stock over perform in the short run and similarly cause a high potential stock to underperform.
Trending approach
A well-informed individual will always invest in shares and stocks that have excellent prospects. However, due to normal market fluctuations, sometimes they can witness a period of concave payoffs. Now, this investor may do one of three things:
- Wait for the market to normalize, because in the long term it definitely will
- Buy more shares at lower NAV, or
- Buy shares of the trending stock with funds from his other equity investments
He could follow the trend in this case because trending stocks are known to produce convex payoffs. Purchasing it may set off the losses he had incurred earlier. However, he will soon pull out of the trend because a common belief could only carry you so far. This is known as the trending approach in equity investment.
Riding one tide to another
Some investors invest in trending stocks and then wait to reach the saturation point. They want to go in on the trend right at the swing lows and jump ship at the swing highs. In practice, however, trending investors do not sell off their shares. Instead, they buy another trending company’s shares at its swing low.These investments do provide short term gains, but the investor has to be incredibly active in the share market to monitor the trends and effectively move them around.
Diversifying portfolio with trends
Serious investors, sometimes, put most of their funds in multiple long-term equity products. This will provide them with substantial returns in the future while setting aside a small portion of their disposable income to be rotated in various trends. This diversification helps them to enhance their long term returns further. Just in case there is some downward activity in the market, riding on trends can save them from mitigating the amount of unrealized losses. In conclusion Some people keep a keen eye on the market trends to know precisely when a share will be performing well and when it will come down. Based on this observation, if they invest or divest, then it is known as the trending approach in equity investment.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.