Amplitude as It Relates to Investments

by Investing School on June 6, 2011

Amplitude is defined as the fluctuation from the equilibrium (zero level). The difference between the zero point and the peak or low point of any wave is the amplitude. While usually used in other fields, such as electronics and radio, when applied to investing it is an important concept when determining when to buy and sell specific stocks or funds.

Every investment has a natural up and down cycle within which it fluctuates based upon numerous factors, both internal to the company and external. Economic conditions are one of those external factors, for example. When an investor is looking at potential investments it is important for them to know both the low price point as well as the high point seen over the last economic cycle in order to determine whether or not to purchase.

Ideally, an investor will purchase a stock when the stock has reached its bottom point in the wave and has just started to go back up. The goal is to sell when the amplitude reaches its maximum point. This can be estimated based upon previous peaks. This is the true meaning behind the advice to “buy high, sell low.”

While there is no guarantee that a stock or any investment will remain within the parameters of previous amplitude marks, they are a good indication of what can be expected. The rise and fall of price points are also called business cycles, and as any economist or experienced investor will tell you, reading the cycles and anticipating changes is a complex and often stressful process.

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