Is Your Stock a Fad?
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When you are investing, it can be very tempting to buy up shares of something that is “hot.” However, these fad stocks have a way of dropping as suddenly as they rise. The problem is that eventually people will start selling these stocks to make their profit. If you are getting in just before the fad ends, you will lose. A fad stock is also often tied to a passing trend, such as Crocs. The Street offers 5 signs that you may be investing in a fad stock:
- Narrow business model: Does the company have a limited product offering? Crocs is a good example, since the company had one product. As soon as the boom associated with Crocs died out, the company began losing value at a rapid rate.
- Momentum volume: If it appears that the volume the stock is trading at is large in relation to its stock float, you might be looking at a fad stock.
- Product replication: Can someone else make the product? If it easy to make a similar product, then the company could easily start losing out as market share goes to other similar products — especially if they are cheaper.
- Financial deterioration: A company can appear flush right after a successful IPO or some start-up capital. But once that starts to disappear and the margins diminish, it is a sign that trouble could be on its way.
- Technology: Watch out for “cutting edge” technology. In today’s world, it is important to realize that what is state of the art today could easily be old news by tomorrow.
It is important to differentiate between a fad stock and a stock with staying power. Fad stocks can be okay for day traders and active traders who have a knack for exiting before things go south, but for most average investors it is best to stick with the “boring” stocks that have staying power year after year.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
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