Topping out is a phenomenon which occurs when stocks reach their peak point at the end of a rising trend. Once a stock has topped out, it is unlikely to gain in value. This is in contrast with a stock which has bottomed out and reached the lowest point of a trough after a period of declining prices. It can sometimes be difficult to tell when a stock is topping out, and being able to predict this point can be advantageous for people who work with stocks.
Topping out is preceded by a steady upward rise in value, although individual days may see brief fluctuations and dips. Once a stock has topped out, the value has nowhere to go. The price may plateau and remain relatively static for a period of time, and the stock can also start to decline in value as people realize that it has peaked and they sell off their stock. This in turn can create a snowball effect as people attempt to dump the stock before it loses any more value.
It is easier to tell when a stock topped out by looking back retrospectively, because the values of the stock over time can be clearly seen and this makes the plateau or decline easy to identify. When stocks are being actively traded and they appear to be topping out, it can be a bit trickier. Actions of people who hold the stock can also impact the value, as people who bought low and sell high decide that the stock has reached its peak and sell off their shares, contributing to a plateau or decline in value.
Other market trends can also be influential. If the market in general is starting to plateau or decline, the values of individual stocks can follow the same trend and a stock which appears to be topping out may be at the end of its rise. However, sometimes markets can be surprising, and it's important to pay close attention to related stocks. Stock in auto companies, for example, can respond to changes in fortune among other companies as stockholders jockey for position.
Savvy stock market players can ride the values of stocks both up and down, and being able to spot the turning point when a stock it bottoming or topping out is critical for making moves. Even people with experience in the market can make mistakes, however, as stocks can sometimes be volatile and difficult to track.
It should be noted that construction workers also refer to topping out but in an entirely different sense, to talk about hitting the top floor of a building during construction. Topping out is usually celebrated with a brief ceremony which marks this important point in a construction project.
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.