If you have spent one day trying to trade in the stock market, you will understand that it is an extremely complex system if not the most complicated thing. It is not just a combination of accounting, economics, statistics, mathematics and so much more but it also that it is actually influenced by a wide range of factors. Conventional methods of analyzing the market include technical analysis, economic and fundamental analysis, and quantitative analysis. However, lately, market sentiment is one of the fastest-growing factors that are taken into consideration as drivers of market movements.
Market sentiment is a force powerful enough that it can influence the behavior of investors and end up having an impact on the movements of the stock market. Market Sentiment refers to the mood and the overall attitude of investors in respect of a particular stock or an industry, or the overall market for that matter.
This market sentiment can go in any direction, positive, negative, or even neutral. Market sentiments are influenced by a large number of factors including but not limited to economic indicators, news events, and other market trends. We have written this blog focusing on how important is sentiment in the market and other things around the topic.
How Sentiment is Used to Determine Possible Movements of the Market
Market Sentiment can be used to calculate the possible market movements in several ways, but some of the most common and efficient ways are mentioned in this section.
Contrarian investing is a simple and at the same time complicated approach that involves going against the determined ongoing sentiment of the market. People putting Contrarian Investing at work assume that the market sentiments are often wrong and that the best way to make money is by going the sentiment.
For example, if the market sentiment is negative, a contrarian investor will look for undervalued stocks that have been oversold, buy them and sell it at a later stage to make profits.
Momentum investing is different from the previous approach we discussed as it involves buying stocks that are trending upward and selling those stocks that are going downwards. This simply means that a momentum investor believes and plays their dice on the fact that the market investment might actually be right.
While there are pros and cons to all the techniques around the stock market, some have proved to be more efficient than others and Event-driven investing might be one of them.
This method analyses news events and their potential impact on the market. Event-driven investing assumes that the sentiment of the market will be a result of the news events and can be used to figure out the upcoming market movements.
For example, if a company releases better-than-expected profits, the overall market sentiment is obviously going to be positive for that particular company which can lead to an increase in the stock price.
Modern-Day Market Sentiment Tracking
In the present times, market sentiments can be tracked through a number of methods. Some of the most common methods include social media monitoring, news analysis, and surveys. Let us discuss them briefly.
Social Media Monitoring
Social media has taken the world by storm in the last decade which has made platforms like Twitter, Facebook, LinkedIn and even Instagram to some extent have become a valuable tools for tracking market sentiment.
Investors can now use social media monitoring tools to track conversations which are related to a particular stock or even an industry. Investors can use sentiment analysis algorithms in order to analyze the attitude and content of posts on these social media platforms to determine market sentiment.
News is and has always been a huge factor for not just market sentiment but the overall mood of a country and even the world hence news analysis is a significant method of tracking market sentiment.
By analyzing news articles, news broadcasts and other media sources, investors get insights into market sentiments. This can be done by identifying certain keywords and phrases that can indicate a positive or negative sentiment about the market’s mood.
Though surveys are an age-old practice, they have generated decent results from time to time. Investors can simply conduct a survey to gather data on a particular stock or industry. In the age of the internet, conducting these surveys online has become a fairly easy task and gathers great insights about market sentiments.
The last on the list is definitely not the least. All of us have seen the tremendous power of artificial intelligence and we have seen it rapidly growing. Sentiment analysis algorithms that use artificial intelligence have been developed that can analyze news articles, social media posts, and a lot of other data sources to identify patterns to deduce market sentiments.
StockGeist.ai is one of the leading organizations in the domain that uses artificial intelligence algorithms to identify patterns and trends in sentiment data. With thousands of people sharing their opinion online about companies across multiple platforms. What StockGeist does is it collects all of this data and then counts the number of messages to rank the stocks accordingly.
The best thing about the platform is that it provides its users with tools that track market sentiment around specific stocks which can help them make an informed decision.
Now that you know how important is sentiment in the market, we can fairly conclude this article on the note that market sentiment has become an increasingly important factor in deducing possible market movements. By understanding the broad mood of the investors around a particular stock, industry, or even the overall market, investors can make informed decisions that can help them increase their profits by making the move at the right time.
While conventional methods that were used to analyze the market sentiments such as fundamental analysis, technical analysis, and quantitative analysis remain relevant, sentiment analysis using Artificial Intelligence has quickly become one of the most efficient techniques. Click here for more on how AI can help you monitor market sentiment.
However, we would ask you to understand the rule of the games properly. You should know that market sentiment is not an accurate predictor of future market movements and should only be used as a factor in conjunction with other analysis methods.