If you are invested in the stock market, chances are you are doing it to earn what is relatively passive or speculative income, ideally generating money from merely having your money in another place for a period of time before selling it for more than you paid. And that idea requires a certain amount of greed, though that may be too strong a term in this example. It is much more likely you are just looking for your money to grow over time so that you can better provide for yourself and your family.
In the stock market lexicon, greed is characterized by the willingness of individuals to sell or buy stock on any given day. The Fear and Greed Index (FGI) produced by CNN uses seven separate factors to determine where people are on their FGI on any given day. The factors they consider are stock price breadth, market momentum, junk bond demand, safe-haven demand, stock price strength, market volatility, and put and call options. These factors are considered while a score from zero to one hundred indicates whether extreme fear, on one end of the spectrum, and extreme greed, on the other end, are dominating the way people are making decisions for any given day.
In this context, greed can be incredibly positive in small doses. You need to take certain risks in order to see any successful investment play itself out. However, doing so too often or at a time when you should be investing more conservatively could spell disaster for your bank account.
It can also be easy to get caught up in a cycle of greed
once you see initial success in your stock market investments. It can be easy to be too ambitious, wanting too much return on any given investment or simply overinvesting at a time when resources should just be conserved instead.
Even more challenging is recognizing exactly when you have gone too far. Having a team of advisors or, if you are an independent day trader, finding someone who may be willing to let you know if they think you have gone too far, can be crucial to seeing a successful outcome. However, if you do not have either of those resources at your disposal, there are ways to recognize if and when you may be acting too much based on greed.
The easiest way to avoid becoming too greedy is to look at stock market trends expanding beyond one day. Just because there is a slight upturn one day does not necessarily mean that trend will continue the next day, especially if you are only looking at those two days independently. Instead, looking at patterns over long periods along with projections on what will happen in the future are crucial to understanding whether you should act more on greed or fear. Understanding that investing when greed is high is a bad idea, along with hanging on to investments even if they do not pay out immediately, are essential lessons to learn.