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How The Stock Market Works (Greed & Fear)

Let’s start by taking a look at how the stock market works.

This way we can understand why this opportunity exists, as well as understand how to take advantage of this opportunity to make big profits from the stock market.

You must understand that the performance of every market or every single stock is determined by its stock price.

So when the price changes this will affect the performance of the market.

The thing we need to consider is what will affect the stock price.

The stock price is affected by the emotion of investors: their greed and fear.

So when investors are greedy they believe that the stock price will keep going higher and higher, so they tend to keep holding and buying more stocks.

That will make the price go up and vice versa.

When these investors feel afraid of holding their investments they tend to get out of the market.

So they’ll sell their stocks and that will make the price decline.

And when these investors feel greedy again their emotion again will affect the stock price.

And this market cycle will keep repeating itself. Changing of course from bull market (almost all stocks going up), to bear market (where almost all stocks are going down).

The way that emotions and fear and greed play into the market make the market go up and down over the years. As well as a number of events which trigger these emotions to take place.

Let’s take an example so you can understand clearly how the greed and fear can affect the investment decisions of most investors.

So for example investors bought a particular stock at about $15 a share and then the price of that stock kept increasing to more than $40 a share.

That made them feel greedy for making more profits and they tended to believe that the stock price would keep going higher and higher.

When the stock price surged from $40 to more than $60 a share, they thought “wow this is a massive winner” greed sets in and they become blinded by the money they think they are going to be making.

And so because these investors felt more and more confident about their investments, this encourages them to keep holding and buying more stocks.

Now the stock prices are skyrocketing to nearly $100 a share and when the price got too high, the investors felt afraid of holding their stocks and they tended to sell all the stocks to get out of the market.

And when a large number of investors started selling their stocks at the same time that made the stock price dramatically drop from $100 to less than $58 in just one month.

In fact inexperienced investors didn’t know that the price would drop.

Instead they hoped that the stock price would keep going up for ever.

And when the price dropped of course they would lose their money.

So in talking about the stock market it’s all about the greed and fear of investors.

And you need to understand this to avoid being affected by such emotions.

And on top of that you can make profits while other people are suffering.


Comments ( 2 )

  1. Yep,. That’s it already. The stock market is driven by greed and fear and not much else actually. While there are events that occur this then triggers the emotions that then in turn move the markets, not the other way around.

    So if you know to be greedy when everyone else is in fear and have fear when everyone else is greedy then you can make a lot of money by reversing against what most people are doing in the market.

    When they zig, you zag.

  2. Understanding the driving forces behind the market is important for understanding why the stock prices jump around and move all the time, it seems there is no sense in the market but then that’s because there is no sense in human emotions.

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