Stock market psychology and behavioural finance: What investors should know
VIX: this index generates a projection of volatility, which can show the speed and range of changing prices over a period. Investors may use the VIX to gauge market sentiment, specifically how fearful market participants feel.
Put-call Ratio: This ratio analyses the volume/oi of puts, or rights to sell an asset, and calls, the rights to buy an asset, over a period. Investors use this ratio to gauge the overall sentiment of the market because it can imply a possible reversal in market trend.
Fear & Greed Index: The fear and greed index is a market sentiment indicator that measures the emotions and psychology of investors in the stock market. It provides an overview of the market of whether market participants are primarily driven by fear or greed at a given time.
Markets may be a voting machine in the short run but they do provide a prism to make us believe what the “group” thinks and this can lead to a variety of biases like “an illusion of being indestructible”, “collective rationalisation” or simply “being blinded to pitfalls”.
According to behavioural finance theory, there are several types of cognitive biases that can affect an investor’s judgment. Being aware of the most common ones can help you avoid them in order to make more rational decisions after all, It’s not what you do in the markets that matters, but it is what you “don’t do” that counts!
Overconfidence
Most people tend to overestimate their abilities in many areas. When you overestimate how much you know about the market or a specific stock,
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