What Factors Do You Consider in Judging Hot Stocks?
What Factors Do You Consider in Judging Hot Stocks?
When people say “hot stocks,” what comes to mind automatically are stocks that pay off profits within the short term. People have an image of stock prices that rise quickly and realize exponential profits in just a day or two, at most a week.
This is a common misconception, however. Stocks are volatile. A sudden rise in price is an indication of a volatile stock, which means its price could fall just as suddenly as it went up. So people’s image of a hot stock is actually an image of an unstable and dangerous stock instead of the promising stock that they envisioned.
Hot stocks are actually those stocks that realize great profits in the long-term, not the short term. Like all investments, it takes time to return your capital to you. This is a pitfall that most uneducated investors fall for. That is why there are still people who fall for the so-called “hot stock tips” in SMS, which is actually a pump-and-dump scam.
Making the decision to invest in reality takes considerable time, during which an investor make extensive research and analysis of certain factors. These factors are used by investors in judging whether or not a certain stock is worth putting their money in, and whether or not it will return the money with a few added incentives.
So how do investors consider the “hotness” of a stock? How do they come up with their decision to make a worthwhile investment?
Factors That Make Up a Hot Stock
Investors look at two factors that determine market trend and identify profitable stocks according to that trend. These factors are: price and volume.
The price is usually determined by both stockbrokers and investors using indicators such as The Dow, Standard & Poor 500 and the NASDAQ. The prices of the stock in these indexes give indications of how the market is moving, whether the trend is up or down. These prices show a measure of the stock’s volatility in the short term.
The volume, as its name suggests, is the measure of how much of the stock is currently being traded in the exchange floors. It is easy to come up with this figure. One only needs to look at daily sales data from the stock markets. Information about this is also readily available from stock exchange websites and websites of the various financial companies in the market.
Once you have this information down, you could see that they actually interrelate. If a stock’s high price results into a high trading volume, you can conclude that it is safe to buy this stock because times are bullish. However, if it has a high volume but low price, this means that other investors are selling off this stock because it is unprofitable. During these times, investing in the stock means a great risk.
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