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Reviewed by Jun 17, 2022| Updated on
Greed and fear index relate to an old Wall Street saying that goes, “financial markets are driven by two powerful emotions – greed and fear.” The Greed and Fear Index is a way to gauge stock market movements and whether stocks are fairly priced. This index is measured on a daily, weekly, monthly, and yearly basis. It is based on the idea that excessive fear will drive down share prices and greed will have an opposite effect. This is due to the fact that investors are emotional and reactionary and set aside self-control and common sense during testing times.
The fear and greed index has factually been a dependable gauge of a noteworthy variation in equity markets. It was first created by CNN to gauge investor sentiment based on seven different factors on a scale of 0 – 100. These seven factors are – - Stock price momentum - Stock price strength - Stock price breadth - Put and call options - Junk bond demand - Safe haven demand - Market volatility All these factors have the same weight. A reading of 50 is considered to be neutral. A reading from 0 to 49 indicates fear and a reading between 51 to 100 indicates greed.
It is seen more as a barometer for market timing rather than an investment research tool. Fear and greed index encourage investors to frequently trade in and out of stocks adding to market volatility.