Investor emotions can play a major role in influencing how the stock market behaves. Market movements are not only driven by economic indicators but also by how investors feel at a given time. Emotions such as fear and greed often lead to sharp buying or selling trends. A widely followed tool that tracks these shifts is the fear & greed index, which provides real-time insights into the overall market mood.
Understanding this sentiment tool can help you interpret short-term price movements, especially during volatile periods. Whether you are watching equity trends or assessing stable instruments like tax free bonds, keeping track of market mood swings can help you make better-informed decisions. The same applies when corporate announcements such as bonus shares are made, where investor sentiment can have a noticeable impact on the stock’s reaction.
What the index captures
The fear & greed index reflects whether investors are taking a cautious approach or showing high confidence. It gives a score between 0 and 100:
● A score close to 0 indicates extreme fear, typically when markets fall sharply.
● A score near 100 suggests extreme greed, often during rallies and bullish sentiment.
● A mid-range score around 50 reflects a neutral market mood.
This score is not a forecast but a reflection of how market participants are currently reacting. The index helps identify whether current movements are emotion-driven or based on fundamentals.
Components that determine market mood
The index is calculated using several market-based indicators. These elements collectively paint a picture of what the broader market is experiencing:
| Component | What it Indicates |
| Market volatility | High volatility signals rising fear |
| Price momentum | A stock trading well above its average suggests greed |
| Put-call ratio | More puts indicate fear; more calls signal optimism |
| Breadth of market gains | A broad rally points to greed |
| Safe-haven demand | Strong bond buying reflects risk aversion |
| Junk bond interest | Higher demand for risky debt signals more risk-taking |
Each of these components adds a unique perspective to the index. Together, they help provide a balanced view of investor sentiment in real time.
Understanding market behaviour using the index
Markets tend to swing between fear and greed. At one end, panic selling can pull prices down, even for strong companies. On the other, rising prices can lead to overvaluation if buying is based on speculation rather than earnings or performance. This is where the index proves helpful—it reflects whether sentiment is justified or exaggerated.
For example, if the market is experiencing extreme fear, some investors may move their money into safe and stable investment avenues such as tax free bonds, which offer fixed returns and tax benefits under specific government-backed issuances. These instruments are generally less affected by short-term sentiment shifts, making them appealing during high-volatility periods.
How investor behaviour shifts with market sentiment
Investor behaviour changes depending on whether fear or greed dominates the market. These phases can influence decisions such as asset allocation, timing of entry and exit, and response to corporate events.
| Market Sentiment | Typical Investor Action | Preferred Instruments |
| Extreme Fear | Capital preservation, selling risk assets | Bonds, fixed deposits, defensive stocks |
| Neutral | Balanced allocation, watchful | Mix of equity and debt |
| Extreme Greed | Aggressive buying, high-risk exposure | Growth stocks, short-term trades |
The index can help you recognise these shifts and decide whether it aligns with your own risk profile and investment goals.
Relevance during corporate actions
Announcements such as bonus shares can receive different reactions depending on the prevailing market sentiment. For example, if a company issues bonus shares during a greed-driven phase, the news may fuel excessive buying based on sentiment alone. However, the same announcement during a fear-dominated period might receive a muted response.
Understanding this connection between sentiment and market reactions can offer useful context when reviewing news related to your portfolio holdings.
Importance for long-term and short-term investors
Short-term traders often monitor market sentiment closely to identify entry or exit points. Rapid changes in sentiment can result in sharp price swings within minutes or hours. For such traders, knowing whether the market is leaning towards fear or greed can help them manage their trades more efficiently.
Long-term investors, on the other hand, may use the index to assess whether the current market environment is ideal for reviewing their portfolio. During periods of high fear, some long-term opportunities may become available at attractive valuations. At the same time, when sentiment reflects extreme greed, it could be time to revisit whether the portfolio has become too aggressive.
Application across asset types
While the index is primarily used to track equity market sentiment, it can also help when reviewing alternative investments. For instance, when fear dominates the market, demand for stable and predictable investments such as tax free bonds may rise.
Likewise, sentiment can influence participation in IPOs, secondary market trades, or the decision to stay invested after receiving bonus shares. A steady understanding of mood swings across the market may help ensure your decisions are in line with your overall strategy.
Limitations of sentiment indicators
It is important to remember that the index reflects sentiment, not valuation. A reading of extreme greed does not always mean the market is overpriced, just as extreme fear does not always suggest the market is undervalued. External events such as interest rate hikes, global cues, or policy decisions can shift sentiment without changing fundamentals.
Therefore, it is advisable to use this tool alongside other analysis methods, such as reviewing company earnings, reading regulatory announcements on SEBI, and tracking data released on NSE India and BSE India.
How to monitor the index
Many financial platforms and market news portals provide real-time updates on the fear and greed index. Although the index is not published directly by SEBI or the exchanges, the underlying indicators used are based on publicly available data. Traders and investors can use these signals to build a broader view of market dynamics.
You can also use your trading dashboard to monitor indicators such as volatility, put-call ratio, and market breadth—all of which influence the sentiment index.
Conclusion
Market sentiment changes constantly, influenced by global events, earnings reports, and economic data. The fear & greed index offers a simplified way to track these mood swings in real time. By understanding whether the market is behaving emotionally or rationally, you can better position yourself for both risk management and opportunity spotting.
Whether you are considering shifting funds to tax free bonds for safety or evaluating the impact of bonus shares on your portfolio, sentiment indicators can offer valuable context. While stock markets present investment opportunities, investors must conduct thorough research while also considering their risk tolerance to help make informed decisions.
