Fear and greed index has become one of the most popular stock market analysis tools for beginner as well as experienced investors. It is used to determine the safest time to enter the market. If you don’t know what a Fear and Greed Index is, how it works, what are its benefits, and how to use it, then this article is for you. In this guide, we’ll discuss every single thing about the FGI you need to know!
Fear and greed index allows investors to learn about the right time to make investment.
What Is the Fear and Greed Index?
The Fear and Greed Index is a tool that was primarily designed to measure the two most common emotions of investors – fear and greed. This index basically allows investors to know the mood of the stock market so that they can make mindful buying and selling decisions. Further, the market mood or the emotions of investors can be measured on a weekly, daily, monthly, or annual basis. As per the theoretical definition, FGI is used to determine whether or not the market is fairly priced. The logic behind this measurement is simple: too much fear brings down the prices of stocks below their intrinsic value, whereas too much greed tends to raise the prices of stocks higher.
How does the Fear and Greed Index work?
Fear and greed index is basically a scale that measures the fear and greed of the investors, or say the mood of the market on a scale ranging from 0 to 100. Here is what the FGI looks like :
- 0-49: A value between 0 to 49 indicates that the investors are fearful, and so the prices of stocks are likely to fall.
- 50: A value of 50 is considered to be neutral.
- 51-100: any value between 51 to 100 indicates that the investors are extremely greedy, and hence the stock’s prices are likely to rise above the intrinsic value.
To measure the exact fear and greed index of the investors, the FGI indicators examine certain factors. These factors are as follows:
FII Activity
FII (Foreign institutional investor) activity is one of the primary factors on which FGI is calculated. It indicates the Index Futures on the NSE. By looking at the movement of this indicator, you can learn about the views of foreign investors in the market. If the values are higher than the average, it suggests bullish FII views.
Volatility and Skew
Volatility is measured by taking into account the VIX index of India. It is the volatility of one-month options of Nifty 50. Skew on the other hand is the difference between the implied volatilities of OTM call options and OTM put options of Nifty 50.
A higher VIX value indicated that the investors are expecting higher volatility and risk in the market. As far as the volatility of markets is concerned, it only tells you that the stock market is expecting some movement. However, it doesn’t tell you in which direction it is moving. This is where the Skew comes in. If the value of Skew is higher than average, then it indicates a downward movement, and vice-versa.
Momentum
Market momentum is the difference between 30D and 90D exponential moving average of Nifty 50 options, divided by the moving average of 90D value. A negative momentum value hints at a downtrend, whereas a positive value shows an uptrend.
Market Breadth
Market Breadth is an indicator that is calculated by dividing AS ratio by the same volume. It is also known as the Modified Arms Index or MAI.
A less than 1 value of these indicators shows a strong market movement and vice-versa.
Price Strength
Price strength is measured by deducting the percentage of stocks near their 52W low from the percentage of stocks near their 52 week high to come near the total percentage of stocks near their 52 week high. Generally, the higher value of this indicator suggests a better price strength in the stock market.
Demand for Gold
This indicator shows the relative Gold price versus Nifty 50 for the last two weeks.
If the return of gold is increasing concerning Nifty 50, then it hints at a movement away from stocks and shares into Gold or other safer commodities.
So, these are the factors on which the fear and greed index in India is calculated upon. You can use any reliable fear and greed indicator to understand the mood of the stock market. Tickertape MMI, for example, is one of the most accurate FGI calculators in India, you can try out.
Benefits of using Fear and Greed Index
FGI is very helpful for the inexperienced investors.
Below are the benefits of using fear and greed index :
Saves time
The fear and greed index saves you from doing time-consuming manual market research which saves your time and research. FGI can help you determine the mood of the market within seconds.
Eliminates behavioural bias
Fear, greed and other human emotions can greatly impact investment decisions. For example, some investors tend to purchase popular stocks even when the company is not performing financially well. Such mistakes later result in hefty losses. The fear and greed index removes the emotionally biased decisions and lets you think practically.
Prevents you from making risky investment decisions
By telling you the right time to buy the stocks, the fear and greed index saves you from making risky investment decisions. Using it, you can buy the best stocks at their lowest price and later sell them at a much higher cost when the market moves up.
Helps in stock market research
Market mood index calculator or the FGI is extremely helpful in stock market research. By noticing various stock market factors, you can learn in which direction the market is moving and what effective investment decisions should be taken according to it.
Fear and greed index calculator is a very helpful and easy to use stock market research tool that allows investors to gauge the market timing. However, it should always be used in conjunction with proper self-research. When used in the right way, it can save you from making risky investments.
