What Is a Record High?
A record high is the highest historical price level reached by a security, commodity, or index during trading.
The record high is measured from when the instrument first starts trading and updates whenever the last record high is exceeded. The values for record highs are usually nominal, which means they do not account for inflation.
Key Takeaways
- A record high is the highest historical price level reached by a security, commodity, or index during trading.
- All-time record highs typically represent significant price news for companies and markets—investors may be enticed to purchase stock, believing the company will continue to perform well.
- Investors employing a more contrarian strategy may look at record highs as an indicator that a stock's price will decrease, presenting an opportunity for shorts.
Understanding Record Highs
All-time record highs typically represent significant price news for companies and markets. Investors may be enticed to purchase stock, believing this company will continue to perform well in the future. Companies thatconstantly reach record highs quickly catch the eyes of prospective investors, while those who repeatedly hit record lows tend to scare off buyers.
On the other hand, investors employing a more contrarian strategy may look at record highs as an indicator that a stock will go down in price, presenting an opportunity for shorts.
Manyinvestors will sell out of a "fear of heights," especiallyafter repeated record highs, if a stock starts edging upward into uncharted territory. Some economists say thisis because record highs feel and sound unnatural to investors, even thoughachieving a record high can be viewed simply as an example of a market or security doing exactlywhat itis supposed to do,as long as the government keeps printing money and the economy keeps growing.
Price increases don'talways go up in a straight line, and overall, pricesgoup more than down, so when someone sells at a record high, the odds are not in their favor.
The Psychological Trap of Record Highs vs. Cost Basis
As a market or stock moves higher, more investors get locked into thepsychological trapof not buying back in after taking profits because a stock's price is higher than when they sold.
Some economists and analysts point to the fact thathuman beingsare behaviorally predisposed to latching onto the price at which a stock is bought and basingthosedecisionson how the current price compares with theircost basis, whilean unemotional approach to buying and selling should be more a question of astock's current valuation, nothistorical price.
Of course, whether a price is at a recordhigh or low, a smart investor willalso look at the business prospects of acompany. If it is well run, and business prospects for the company appear to be in line with future growth, it may make sense to ignore the distraction that a record high or low may be.
So many factors play into the price of a stock. Oftentimes, company financial fundamentals and business viability aren't the factors to which investors react.
