Fear and Greed - Driving Forces of the Stock Market

By Manshu Verma

Fear and Greed are the two driving forces of any market. Greed inflates prices: gets more and more people to jump in the bandwagon and buy the stock, commodity or tulip bulbs and drive prices to a level where they are no longer sustainable and become a bubble.

When greed overcomes the market; no one talks about fear. Greed completely eclipses out fear and the fact that people usually have a short term memory also does quite a bit of good. In times of bull market rallies, people forget what it was like a few months or few years ago and what it meant to be fearful.

During the real estate bubble, investors forgot about the fear and panic that accompanied the dot com bubble. This time it is different - everyone will tell you. The fact that the market collapsed and crashed just a few years ago doesn't help to keep things in perspective and the market heads for one more collapse.

This is just human psychology, and has nothing to do with the country or even century you are in. The first speculative bubble was recoded during the 1600s in what is now Netherlands. It is recorded that prices reached such a high that at one point - 12 acres of land were offered for one variety of a Tulip bulb!

At that time greed was on its high and had completely eclipsed fear. One reason given by historians for the high prices of tulip bulb contracts was that people expected that there will be a parliamentary decree that will void the smaller contracts of tulip bulbs and limit the risk of the buyer.

During the dot com bubble the greed was fed by the assumption that old economic cycles are not applicable to new technologies and the Internet will completely change our lives.

Whatever be the reasons: when greed grips the market it overshadows fear completely and makes people forget how scared they were just a few years ago.

Past Greed and Future Greed

Fear works in much the same manner, and, when fear grips the market it eclipses future greed and exaggerates past greed.

People have lost a lot of money in the current financial crisis and they are attributing much of it to the greed of Wall Street Bankers, Hedge Fund Managers, Real Estate Brokers and their like.

Everywhere there are cries about how greedy people at Wall Street have ruined the savings of Main Street. Fear has gripped the market and greed is the culprit.

People are not talking about future greed though, not yet in any case. No one is asking - where the next bubble will form?

Markets are gripped with fear and are blaming past greed, but, that completely eclipses out the fact that there will be future greed.

There are a few seasoned investors who are talking about where the next big move is going to come in - green energy, gold, agriculture, emerging markets etc. but their voice has been crowded out by the cries of fearful investors.

Greed and Fear work beautifully in tandem and complement each other perfectly.

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