FEAR AND GREED PLAY A BIG PART IN STOCK INVESTING
Anyone researching how to buy stocks and wanting to understand some stock market basics should be interested in learning what drives the market up and down.
Is it fundamentals?
Is it economic news?
Is it computerized buy and sell programs?
Is it greed and fear?
The answer is that it can be all of the above. Fundamentals play the biggest day to day role in the price of stocks and the price of the market as a whole (Dow Jones Industrial average and NASDAQ). How a company is performing is probably the single most important factor at any one time. If a company is not making money or the prospects for making money in the future look bad, the stock price will probably suffer no matter what happens to the economy. On the other hand, if a company is hot and doing well, the stock price may hold up even in the darkest of economic times.
Of course there are hundreds of variables that are considered “fundamentals”. Analysts will cite any number of things that supports their opinion when they are giving recommendations and these things can get very technical and hard to understand for an average person. However the bottom line is simply if things are going well with a company and the future looks good too, the fundamentals are probably pretty good as well.
The overall economy always is a factor in driving the stock market higher or lower. In a tough economy like we have now with high debt and low jobs, it is hard for the market to go up too much because of people’s uncertainty of the future. It may not have an effect every single day on the direction the market takes but a bad or good economy does make a difference to people on whether they are more willing to buy or sell stocks.
Computerized buy and sell programs are a new thing that have not been around for very long. With the Internet and the market becoming so technologically advanced, much of what was once done manually is now done by computers. This includes trading programs that brokers have in place that are triggered by the market dropping below certain points. Although it doesn’t happen very often, we have seen instances where bad days in the market were made much worse by these computerized programs being triggered and selling off more stocks just because the market dropped below a number. It is truly a new world out their with the Internet and different technologies playing such a big part in the day to day workings of the stock market.
Finally, we come to greed and fear. As I have discussed, stocks trade on fundamentals much of the time. However, it is always people’s perceptions and interpretations of those fundamentals that determines whether a stock is going to go up or down. This means stocks trade on people’s emotions and how they FEEL about a stock or the stock market. When the stock market is going up, people often get greedy and buy it up higher than it deserves to be. Likewise, when the market is in free fall, people panic and sell out of fear. They often overlook everything that logic might dictate and make their decisions on fear and greed alone.
People buy and sell stocks on greed and fear every day and that means they might not be making the best decisions. If you want to be a successful stock investor, it is a good idea to try and stay away from trading on pure emotion and stick to stock market basics. Determining when to buy a stock and when is the right time to sell it should be done logically as best as you can and by assessing what you think the future will bring for the company. Whenever you get greedy you are probably going to make an incorrect trading decision as you most likely will also do if you are full of fear.
