It is a fact that stock market is controlled by two very powerful human emotions, greed and fear. The stock market players are all human beings and very much susceptible to these two very strong human emotions. It is the fear and greed psychosis that are instrumental in creating bull and bear markets and is also the cause of all stock market bubbles. Playing directly into the hands of these two profound emotions can be extremely detrimental for the individual investor’s portfolio and also for the market in general.

Now let us analyze what causes this fear and greed among the shareholders. There is generally the fear of losing out on good deals, fear of holding too long, fear of incurring losses, fear of market crashes, fear of getting in or out too early or too late, etc. On the other hand, minds also get gripped with greed for more profits, greed of incurring quick profits, etc. Fear is generated at a point in the cycle when the price stops going up and greed at the point when the price stops going down.

Greed is nothing but excessive desire. Let us see what happens when the crowd of investors gets caught in the mesh of greed or desire to acquire as much as possible and as fast as possible. The dot com bubble is a case in point. In the 1990s the Internet boom had occurred. Investors were ready to pitch in for anything that ended with a dot com. Buying through Internet had reached a feverish pitch. Investors got greedy and further fueled the prices of securities and as a result securities started getting overpriced. Thus the dot com bubble was created.

How exactly does greed contribute to a bubble? When a stock gets hyped in the market, greed compels general investors to pitch in money for those particular shares. Further as the hype gets pronounced the prices soar and greed also increases. More and more people fall into this trap and start buying these shares thus pushing the prices further up. And then while the bull market is being created, greed makes the investors hold on to the shares and then when smart money starts selling after the stock market has reached the peak, the market tumbles. This is the point when fear comes into the scene. This fear can easily create a panic situation in the market and in the panic that is triggered investors start selling, thereby causing the stock market to tumble or crash or sometimes the bubble to burst.

Fear can impact the market strongly. Fear as is unpleasant and strong emotion as greed. When stocks have already sustained losses for prolonged time, investors might get fearful of sustaining further losses. Just as greed dominated the market during dot com bubble, similarly, fear may also prove to be equally costly for the market. When the market is plunging, in an attempt to cut off further losses, investors try to move out of stock markets quickly to shift to less risky buys. They start transferring their investment capital to low-risk low-return securities. The market goes fully awry where the market fundamentals of even long-term investment plans are completely disregarded after the investors’ minds get overrun with fear of sustaining further losses. But unfortunately, what people fail to understand is that the hole that has been burnt through the pockets due to the massive downturn can never be compensated by investing in these new instruments and the chances of rebuilding the wealth gets even dimmer by moving out of the stock market and trying something entirely different and starting once more from scratch.

These two forces of greed and fear contribute immensely to market volatility. Investors lose their comfort level and the market loses its stability. Investors caught in the grip of these overwhelming and powerful emotions often commit costly mistakes. They are therefore always advised never to succumb to these emotions and stick to the fundamentals of investing. Controlling your emotions, reevaluating your investment strategies, allowing a bit of flexibility to the premeditated investment plans, being rational, not following the market sentiments blindly and sticking to the long-term investment strategies are some ways you can be a successful investor.

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