Momentum investing is a strategy that involves buying securities that have shown an upward trend in returns over a specific period and selling those that have shown a downward trend over the same period. The underlying belief is that these trends will continue in the future. This strategy is based on the principle of 'the trend is your friend', meaning that it is often more profitable to align one's positions with the current market trend rather than trying to predict future market movements. Momentum investors believe that stocks which have performed well in the past are likely to perform well in the future, and similarly, stocks which have performed poorly in the past are likely to continue doing so. This strategy is often used in conjunction with technical analysis and specific trading rules based on data like price and volume.

Choice A is incorrect. Momentum investing does not involve going long on stocks that have low prices and shorting stocks that have high prices. This is a description of value investing, not momentum investing. In value investing, investors seek out stocks they believe are undervalued by the market, which often means buying low-priced stocks in the hope they will increase in value.

Choice C is incorrect. Momentum investing does not involve going long on small-cap stocks and shorting large-cap stocks. This strategy might be part of a specific investment approach based on company size, but it's not inherent to momentum investing. In momentum investing, the focus is on the trend of stock returns regardless of company size.

Choice D is incorrect. As explained above, choice B accurately describes the core principle of momentum investing: going long on upward-trending returns over a specific period and shorting downward-trending returns over the same period.

Things to Remember

• Momentum investing is based on the belief that past trends in stock performance will continue into the future.
• Investors using momentum strategies often rely on technical analysis and specific trading rules.