The psychology of FOMO: What every new investor must know

FOMO —Fear of Missing Out— is a common emotional reaction many of us experience in daily life. It’s the uneasy feeling that others are enjoying opportunities or experiences you’re not part of. For instance, when friends go on trips, buy new gadgets, or jump onto social media trends, you might feel pressured to join in so you don’t miss out.

The same emotional pattern plays out in the world of stock trading, but with much more serious consequences. When investors see others making big profits from a particular stock or market trend, they often feel pressured to act quickly. They fear missing a chance to earn quick money.

This fear can push people into buying stocks without proper research or understanding the risks involved. Instead of relying on logic or facts, they follow the crowd. If everyone is buying, they buy too, even if the stock price is already very high. Then, when the price suddenly drops, panic sets in, and they end up selling at a loss.

In simple terms, emotional decisions replace logical financial decisions. It’s like jumping onto a fast-moving train just because everyone else is on it, without checking where the train is actually headed.

How do people fall into the FOMO trap?

Take the example of Sijo (name changed), a 32-year-old IT professional from Kochi. He started trading during the 2020 lockdown while working from home. He began following financial YouTubers and Telegram groups that offered hot stock tips.

One morning, he noticed everyone talking about a fast-rising stock, ABC Renewables, a solar energy company. Its price had doubled in just two months. Friends and online groups were saying, “Don’t miss out, this is a big opportunity.”

Although he knew almost nothing about the company’s fundamentals, Sijo bought 500 shares at ₹480 each, convinced the price would soon cross ₹600. When the stock climbed to ₹520, he felt proud and confident.

But a week later, when the company reported losses, the stock crashed to ₹350. Panicking, Sijo sold his shares. His total loss: ₹65,000.

Ironically, a few months later, the same stock climbed back to ₹490, but by then, Sijo had quit trading entirely. This simple story perfectly captures the psychology of FOMO.

The key: Learning to overcome FOMO

Overcoming FOMO is essential for becoming a better investor. Sijo’s experience is a reminder that emotional trading can lead to poor decisions and unnecessary losses.

Instead of blindly following market trends or social media tips, investors should understand what they’re investing in.

Studying a company’s performance, setting clear goals, and making decisions patiently, rather than impulsively, always leads to better outcomes.

Good habits such as regular investing, seeking proper financial advice, and avoiding overreaction to every market fluctuation can help build long-term stability. In the long run, calm thinking and discipline outperform the temptation of chasing quick profits.

(The author is an Assistant Professor in the Commerce Department at St Thomas College, Thrissur.)