Market Segmentation & It's Importance

Since its inception, the working of the stock market has undergone several changes. And thanks to technology for making it easy for investors. Now an investor can buy or sell any stock from anywhere in the world. And all an investor needs to do is perform thorough research about a particular stock before investing. Though several fundamental and technical factors are considered before investing, market sentiment can also help understand stock and the market. In this blog, let’s discuss market sentiment analysis, its importance and how to measure it in detail.    

What is market sentiment?

Market sentiment is the attitude and mood of investors towards a stock or a specific sector in the market. In simple terms, market sentiment can be described as the aggregated public view or opinion that can make up market psychology. The public sentiments on the market can result from several external factors like policy changes, management behaviour, natural disasters or any macroeconomic factor. This sentiment can impact the price of stock either positively or negatively.

How can market sentiment impact the stock market? 

The falling stock prices indicate bear market sentiment, while the rise in the prices indicates bullish market sentiment. Usually, markets are driven by emotions like fear and greed. When there is a stock with certain positive changes to the management or any external factor, everyone wants to buy the stock expecting it would make high returns. This eventually can lead to a bullish trend. And if any negative or unimpressive changes take place in the company, the stock can see a bearish trend. Analysing these emotions in the stock market is called market sentiment analysis. 

Importance of market sentiment analysis to predict a stock price 

Let’s assume there is a stock where the price increases, and you try to invest in it without analyzing the company. This can be due to the fear of missing out (FOMO). In such cases, we might have seen that after investing, the stock prices start coming down, entering the bear market, which can turn out to be a loss for the investor. 

For example, you are buying 10 stocks for Rs. 100. But after you buy, the stock price drops. In this case, out of fear, selling all 10 stocks for Rs. 70 is a loss. This is because you didn’t know the right time to invest in the market and got driven by the market movements. 

An investor can use market sentiment analysis to determine whether the market is driven by feelings and emotions or by rational decision-making. Market sentiment analysis is considered valuable as it can help you determine the opinion of investors.