Definition of Rebound
The term rebound generally means to bounce back or rally from a setback. In basketball, rebound is the attempt to recover the ball after a failed shot attempt. In the financial world, however, it is defined as the positive reversal from a previous low price or low level, e.g., stock prices, housing prices, or the economy as a whole.
To put the term rebound into perspective, let’s take the example of collecting comic books. Although generally, vintage comic books often generate high profit when stored and put on sale or auction over a period of time, there are several aspects that dictate its price at any given time. Since it is highly regarded as a good investment, many people think that their prices are just going to get higher and higher over the course of time. But this is not always the case for some comic books. Since supply and demand plays a significant role in dictating its price, some comics’ prices decline or remain at their current level when fewer people are willing to pay, and this often results in sellers willing to sell their collection at a lower price. Some collectors even prefer just to put their Avengers comic back in their storage chests and hope that prices will go back up in the long run.
How rebounding is related to investing
Rebound is one of the considerations stock traders or investors use in determining when they will invest in a specific stock. One strategy stock traders utilize is they look for an upward trend in stock prices and then decide whether to buy or not. Another strategy is to study companies who recently experienced a decline in their stock prices, and traders take this opportunity to invest while stock prices are low. This approach is ideal if there is a high probability that stock prices will bounce back and rebound from its previous position.
Now, an upward trend in stock prices doesn’t always mean it’s on the rebound. There is a term in the financial universe that’s referred to as a dead cat bounce. The term refers to a phenomenon that happens when there is short-lived recovery from a continuously declining stock price. Usually, it’s not advisable to invest in stocks that are experiencing a temporary recovery because it will inevitably be followed by a downward trend. This is why it is highly essential to identify first whether a stock is really on a rebound or just on a dead cat bounce phase.
In summary, while it is regarded a smart decision to invest in a specific stock during a rebound, it is advisable for potential investors to study all aspects of stock price movements first. And it can be achieved by analyzing the company’s stock price trends and the reason for its movement, whether downward or upward.