What Does It Mean When a Stock Has Gone "Parabolic"?

Financial reporters use the term "parabolic" to describe the behavior of a stock - and occasionally the general market - the value of which has risen dramatically in a short period of time. As a rule of thumb, investors should consider such reports as warnings.

News about a company can often drive the price of its stock soon at the top as new investors and day traders jump on the bandwagon. After the initial burst of enthusiasm, the price decline for a few days before it starts getting to rise again. Patient investors who are investing for the long term tend to before buying to see if the recent development improves the fundamentals of his business. Investigate the company first

This is not the case with a parabolic situation. What happens is the share price just keeps rising without pause as more and create what looks like a never ending cycle of higher prices each trading day. More investors The daily chart will take on the characteristics of an exponential curve that appears in its vertical pattern.

Each trading day more investors buy shares of the company. This increase in demand tends to create. Sharp upward gaps in price The process can continue for several weeks as the share price first doubles, then triples and so on, until the valuation is much larger than the usual parameters used by investors to assess. Shares of a company

But no one seems concerned if the share price remains higher. A confidence hysterical relationship develops in the minds of investors, who seem convinced that the share price will only continue to rise without end.

These situations invariably end up with the same result. One day, usually the price reached a peak during mid-session, and then starts declining. At first it seems the only day traders take quick profits of a few points. Because confidence is so high, investors expect to resume. Rapid rise But the price continues to drop.

At this point, panic-buying reverses to become panic-selling. The price starts to drop dramatically during the remainder of the session opens lower the next day, and his descent remains almost as quickly as it rose. Early buyers can still out with a nice profit, but those buyers who arrived late, and that just considered a small decline as a temporary setback, often wind up selling their shares at huge losses.

The parabolic situation can be compared to the bacteria to grow in a culture dish. These organisms repeatedly divide as the total population increases on an exponential basis. A single organism is two. These two gap to four. The four gap to eight. The total population in the dish is expanding rapidly to thousands, perhaps millions, of unicellular organisms grow and divide.

Then the nutrient which the bacteria were feeding in the food runs out. In the case of a stock whose price is rising exponentially, it is a matter of no buyers show up willing to pay even higher prices. The result in the culture dish is a massive die-off, and a collapse of the price of the stock share.

When an investor hears or reads the word "parabolic" attributed to a stock, he has a situaiton of caveat emptor consider, or "let the buyer beware." If he decides to take a share position must first be understood is a high degree of risk associated with such a decision. If the investor is not in a position to look on a constant basis, the share price is the best course of action is to completely avoid it.