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.
- 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 that constantly 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.
Many investors will sell out of a "fear of heights," especially after repeated record highs, if a stock starts edging upward into uncharted territory. Some economists say this is because record highs feel and sound unnatural to investors, even though achieving a record high can be viewed simply as an example of a market or security doing exactly what it is supposed to do, as long as the government keeps printing money and the economy keeps growing.
Price increases don't always go up in a straight line, and overall, prices go up 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 the psychological trap of 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 that human beings are behaviorally predisposed to latching onto the price at which a stock is bought and basing those decisions on how the current price compares with their cost basis, while an unemotional approach to buying and selling should be more a question of a stock's current valuation, not historical price.
Of course, whether a price is at a record high or low, a smart investor will also look at the business prospects of a company. 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, and oftentimes, company financial fundamentals and business health aren't the factors to which investors react.