The goal of any stock investor is to put money into a company that is poised to generate healthy returns on investment. These stocks appreciate noticeably in price, driven by strong operating results and robust investor demand. They are usually referred to as momentum stocks. Investors continue to snap up these stocks as long as the company continues to deliver profit reports that exceed market expectations. The climb in share prices and stock premium valuations will continue as long as the company continues to deliver stellar quarterly results.
To maximize potential trading profits from hot stocks, the investor wants to get into these stocks before they appreciate substantially. The objective is to get into the stock early in the up trend appreciation of its price. The stocks at this point are likely to be in a long base building formation and are posed to break out on the upside. At this stage, the valuation of its shares is still attractive.
Valuation ratios include price to earnings and price to shares. Once these shares catch the market's attention, their stock valuations get pushed up to higher levels.
The situation that will spark the stock's ascent is their profits. Even if the company is reporting stronger than expected profits, it could be several quarters before investors acknowledge the positive development. It is during these periods, that the investor has the opportunity to buy the shares of these companies before they substantially go up.