There are many reasons an investor may decide to buy a stock that is currently at a high quotation.
When examining the “risk/return” ratio, an investor may do a fundamental analysis and determine that the company remains undervalued.
Usually, there’s a good reason for a stock’s high price: the company is doing well, and the market recognizes it. In general, if a company gets its act together, it will do well for several years, with the stock continuing to increase over that period.
An investor may also use technical analysis to determine whether the stock is now in a downward trend that will soon reverse. Stocks don’t trade in a set price range. The prospect of additional increases is not ruled out by a stock’s all-time highs.
Professional investors will develop models that account for all of these factors, both positive and negative, and use them to evaluate the stock’s value. Another investor, on the other hand, may take the identical factors, make slightly different future assumptions, weight the parts differently, and come up with a completely different price goal.
Investors don’t always get it right. You could buy a stock at what you think is a good price, only to see it free fall for no apparent reason.
The truth is that some people are accurate about the stock’s direction while others are wrong; markets may go sideways as well as up and down.
In my opinion, investing should be classified into two types. One is value investing, which entails believing that a stock is now cheap and hence worth buying. The second is a growth strategy, in which investors assume a stock’s value will climb in the future as profits rise. People will acquire a stock under the growth strategy even if it has increased considerably in value because they feel it has room to develop further.