Table of Сontents
- ‘FOMO’ Meaning
- Disadvantages of ‘FOMO’ Trading
- ‘FOMO’ Trading Triggers
- How To Overcome ‘FOMO’
- Bottom Line
In the context of investing, FOMO is the fear of missing out on investment opportunities, particularly those that are garnering a lot of attention.
The term “FOMO,” or “fear of missing out,” was first used to describe the pain that results from passing up chances and experiences like nights out with friends. However, the term FOMO is frequently used in the context of investment to describe how feelings like impatience or jealousy influence investors to make bad choices.
When there is a significant rally or investing plan that the press or other traders are talking about, FOMO, often known as the fear of missing out, can hit. Generally speaking, it denotes a trader’s worry about the fact that others are profiting from an investment’s price movement while they are not. However, a retail investor or institutional trader may acquire a position before thoroughly studying it to see if it is a suitable investment out of a desire to jump on the bandwagon and profit from the trading method others are using.
Disadvantages of ‘FOMO’ Trading
FOMO-fueled trading frequently doesn’t produce a profitable return on investment. Security may be performing well now, but it doesn’t guarantee that it will do so in the future. By making investments in price changes or market trends just before they’ve run their course, many investors actually wind up losing money.
In investing, FOMO frequently works against the general financial maxim of buying cheap and selling high. Instead, it entices investors to purchase a stock at a premium price. Things like fear and impatience prevail over discipline because they elicit emotional reactions.
Not only are investors purchasing at a potentially inflated price point, but FOMO trades are frequently done on extremely volatile exchanges, which can make them riskier trades.
‘FOMO’ Trading Triggers
A variety of circumstances might cause investors to suffer FOMO and make rash stock purchases.
1. Trading Forums
Communities of traders are known to exchange advice and motivate one another to purchase stocks. But that doesn’t always indicate that everyone should invest in the same trade just because a lot of other people are doing it.
Exists a stock that is performing very well and making headlines? Investors may feel FOMO and want to buy it as a result. Its surge, though, could have already peaked.
3. Market Volatility
Due to the price movement in both directions, market volatility might be a fantastic opportunity to make money. Instead of trying to choose security that is trending in one direction in the hopes that it will continue, it is preferable to profit from market volatility through existing investments. Investors shouldn’t be making these transactions during such a volatile period unless they fully comprehend the cause of the volatility and believe they can foresee potential outcomes.
4. Meme Stocks
Exists a stock that everyone is purchasing for laughs? Even while an investor may believe they would profit from investing in it, there is a considerable risk they may lose their money.
There may be pressure to act on hot recommendations, whether it comes from following a trader on Twitter who consistently makes profitable trades or reading articles about possible trading possibilities.
How To Overcome ‘FOMO’
- Trends in market price imply the opposite of FOMO, even though FOMO might make an investor want to buy the asset that everyone else seems to be making money off of.
- Buying low and selling high is by far the best strategy for investors, and they are frequently more likely to profit from less well-known investments. So how can traders prevent succumbing to FOMO and placing poor trades? Here are some tips for dealing with FOMO when investing in the stock market.
1. Do Research
Investigate a security’s fundamentals, price patterns, and outlook before purchasing it. Never invest in securities whose price fluctuation isn’t backed by the company.
2. Stick to a Trading Strategy
Every investor should have a trading strategy based on their approach to trading, level of risk tolerance, diversification tactics, and overall financial goals. Make sure these are being followed before investing in a FOMO stock.
3. Be Ready to Lose
Keep your stake modest and only invest what you can afford to lose if you truly want to participate in a FOMO trade.
Waiting until the following day or the following week and conducting research may help investors who feel the need to act quickly due to FOMO control their impulse to take a position that may not be in their best interests. After waiting and doing their investigation, they should open the position if they still want to. However, it’s possible that the temptation to buy the overvalued stock was emotional and will now be gone.
5. Track Trades
Investors who engage in FOMO trading should keep track of all of their transactions in an Excel spreadsheet so they can contrast the results of transactions based on research and fundamentals with those based on FOMO. Reviewing previous transactions might help develop future trade strategies and deter FOMO trades.
FOMO is a common experience. However, employing FOMO to drive investment decisions frequently results in impulsive trades that are poorly thought through and might result in substantial losses. FOMO tempts investors to purchase equities at a premium, which is frequently a poor financial move.