What does a momentum strategy suggest to investors regarding stocks that are rising?

A momentum strategy is based on the premise that stocks that are rising will continue to rise in the near future due to the prevailing trend. This approach relies on the idea that price trends can persist for some time, attracting additional investors and creating further upward movement in the stock's price.

When investors identify a stock that is experiencing upward momentum, the strategy encourages them to buy into that stock. The rationale is that the momentum creates a self-fulfilling prophecy: as more investors buy shares, the demand increases, pushing the price even higher. This behavior is often driven by psychological factors, such as fear of missing out (FOMO), which can amplify the momentum effect.

In contrast, options that suggest selling to secure profits or holding indefinitely do not align with the core principle of momentum investing, which focuses on capitalizing on ongoing trends rather than locking in gains or taking a long-term approach without regard for market movements. Likewise, ignoring the stock diverts attention away from potential opportunities to capitalize on momentum, which contradicts the objective of utilizing a momentum strategy effectively. Therefore, the approach that advocates buying into a stock rising in price aligns perfectly with the essence of momentum investing, reinforcing the expectation for continued upward movement.