If you’re a newbie financial investor, then you probably have heard your fellow investors talking about the fear and greed index. The Fear and Greed Index has become one of the most important investment analysis tools for investors. It is used to check the mood or environment of the stock market and to determine whether it is the right time to enter the market or not. In this article, we will discuss everything you need to know about the Fear and Greed Index along with some tips to use it in the right way. So, without any further ado, let’s begin!
What is fear and greed index?
Fear and Greed Index is basically an index that helps investors to gauge the mood of the stock market based on the sentiments of other investors. In other words, it helps in determining whether investors are too bearish or bullish in the stock market. Just like any other scale, the Fear and Greed Index ranges from 0 to 100, where the position 0 indicates extreme fear and 100 denotes extreme greed.
Moreover, there are a total of seven factors on the basis of which stock market sentiments are gauged. Note that, each factor ranges from 0 to 100 and an average value is generated, which determines the final index value. More than a market-timing tool, FGI is seen as an investment research tool, which is there in every beginner’s stock market analysis toolkit.
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Why and how to use fear and greed index?
The Fear and Greed Index allows you to identify if the stock market is priced fairly by looking at the emotions of investors. It works as follows:
Generally, when investors are fearful, they tend to sell their stocks and other holdings, bringing down the stock prices to a level where they are far less than their original price. On the other hand, when the investors are greedy, they tend to buy more and more stocks, which takes the stock market price as higher than the intrinsic value. In other words, fear is seen as an indicator to buy stocks, and greed is seen as a signal to sell the stocks.
Here is what the Fear and Greed Index looks like:
0 to 49 signals fear
50 means neutral
51 to 100 signals greed
Now, the question is, how investors utilise the Fear and Greed Index? Let’s find out.
Most new as well as experienced investors use the Fear and Greed Index to determine the right time to enter the stock market. This is the reason why some pro investors see it as a market-timing tool rather than an investing research tool. Click here to check what the market mood index looks like.
Let’s understand this with the help of an example. Suppose, if an index touches a value of 95 or 90, it may indicate that stocks are overpriced. It may trigger the investors who follow the index for making their selling decisions.
Tips for using Fear And Greed Index
The Fear and Greed Index as such, is a great stock market research tool for the investors, especially the beginners who have no idea or knowledge regarding when to enter or exit the market without suffering loss. In other words, investors can make better financial decisions by knowing the right time to enter or exit the market.
However, just like any other thing, FGI is only helpful if you know how to use it correctly. To help you with it, we are sharing some important tips about the usage of the Fear and Greed Index in the right way. These are as follows :
1.Always use FGI to understand that investing is greatly affected by emotions like fear and greed. You can suffer major losses if you make decisions based on your emotions. So, make sure your decisions are based on solid research and analysis rather than emotions.
- Use the Index to find out the right time to enter the stock market, or to determine the right time to buy the stocks. For instance, if you find a stock getting undervalued due to a rise in fear of investors, that can be the best time to buy that stock.
- Never solely rely on the Fear and Greed Index or any other market mood indicator or sentiment measure for making your financial decisions. Fundamental knowledge is of uttermost importance in stock marketing. Before making any financial decision, one should know how a company is performing, where your economy is going, etc.
Final words
The Fear and Greed Index is a wonderful tool for tracking the sentiments of investors and the mood of stock markets. Investors mostly use it to take an overview of the market, so when their fellow investors seem fearful, they buy the stocks, and when this herd seems greedy, they sell their holdings. While it is a great tool for determining the right timing to enter the market, it must be used in conjunction with solid research.
