What Is 'FOMO' In Investing?

Updated: Feb. 16, 2022By: Amanda Reaume

When it comes to investing, FOMO means the fear of missing out on investment opportunities, especially those that have a lot of buzz around them.

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FOMO or fear of missing out is a slang term originally created to talk about the distress one feels at missing out on experiences and opportunities like nights out with friends. However, FOMO is often used in investing to discuss how emotions like impatience or envy motivate investors to make poor decisions.

'FOMO' Meaning

When it comes to investments, the fear of missing out or FOMO can strike when there is a big rally or investment strategy that the news or other traders are talking about. Generally, it means that a trader is feeling anxiety because others are making money on an investment's price movement and they're not. But the desire to be part of the bandwagon and make money off the trading strategy others are profiting from could make a retail investor or an institutional trader enter a position before properly analyzing it to determine if it is a good investment.

Disadvantages of 'FOMO' Trading

Trading when spurred by feelings of FOMO often doesn't result in a positive return on investment. Just because a security is performing well doesn't mean that it will continue to do so in the future. In fact, many investors lose money by investing in price movements or market trends right before they've run their course.

FOMO in trading often works contrary to the common investment edict to buy low and sell high. Instead, it encourages investors to buy when a stock is already high. Since it generates emotional responses, things like fear and impatience win out over discipline.

FOMO trades can often be riskier trades, not just because investors are buying at a potentially inflated price point, but also because they're often executed on highly hyped investments like meme stocks or cryptocurrencies.

Tip: As the longer a stock experiences significant positive price movement the higher the likelihood it will encounter a market reversal or level out, trades completed because of FOMO often end up being unwise trades that could have been avoided with discipline and a strict trading strategy.

'FOMO' Trading Triggers

There are a number of situations that might make investors experience FOMO and buy stocks impulsively.

1. Trading Forums

Trading communities are known to share tips and encourage each other to buy stocks. But just because a number of posters are investing in a particular trade doesn't mean it's right for everyone.

2. News

Is there a stock that's performing particularly well and is in the news? That could make investors want to purchase it because of FOMO. However, its rally might have already run its course.

3. Market Volatility

Market volatility can be a great opportunity to make money as there's price movement in all directions. However, it's best to profit from market volatility through the positions one already has rather than trying to pick a security that is moving in one direction with the hope that will continue. Unless an investor understands the reason for the volatility and feels they can predict what might occur, they shouldn't be making these trades during such a tumultuous time.

4. Meme Stocks

Is there a stock that everyone is buying as a joke? An investor might think that they'll make money if they invest in it, but there is a good chance that they could end up losing out on the money they invested.

5. Tips

Whether one follows a trader on Twitter who is always making good trades or reads articles about potential trading opportunities, there can be pressure to act on hot tips.

How To Overcome 'FOMO'

While FOMO can make an investor want to purchase the security that everyone else seems to be profiting off of, trends in market pricing suggest the opposite of FOMO.

An investor is much better off buying low and selling high and often is more likely to make money on less popular trades. So, how do traders avoid giving into FOMO and making bad trades? Here are some suggestions for how to overcome FOMO in stock market trading.

1. Do Research

Before buying a hyped security, do research into its fundamentals, pricing trends, and outlook. Don't buy a security whose price movement isn't supported by the business.

2. Stick to a Trading Strategy

All investors should have a trading strategy that's based on their trading philosophy, risk tolerance, diversification strategies, and broader financial plans. Before investing in a FOMO stock, ensure that these are being followed.

3. Be Ready to Lose

If an investor really wants to invest in a FOMO trade, they should keep their position small and only invest what they can afford to lose.

4. Wait

If an investor feels an urgent need to make an immediate trade because of FOMO, waiting until the next day or next week and doing research might quell the urge to enter a position that might not be in their best interest. If they still want to open a position after waiting and researching, then they should do so. However, it's likely that the urge to purchase the hyped stock was an emotional one and the emotion will have passed.

5. Track Trades

Investors who make FOMO trades should track all their trades in an Excel document so that they can compare the outcomes of trades that they made based on analysis and fundamentals and trades that they made based on FOMO. Reviewing past trades can inform strategy for future trades and could discourage FOMO trades.

Bottom Line

Feeling FOMO is a fact of life. However, using FOMO to motivate investing decisions often leads to emotional trades that aren't well researched and could generate significant losses. FOMO encourages investors to buy stocks while they're already high - which is often a bad investment strategy.

This article was written by

Amanda Reaume profile picture
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Amanda Reaume has been writing about retirement, investing, and financial planning for over a decade. She has been published in USAToday, Time.com, Yahoo!Finance, Business Insider, Forbes, and Fox Business. She is a former credit expert at Credit.com and wrote a book about financial planning and investing aimed at millennials.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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