The role of herd behavior in stock market rallies and crashes is that people start buying or selling stocks just because others are doing it. This leads to overbuying in rallies and panic selling during crashes. Instead of using facts or analysis, decisions are made emotionally, which increases market volatility and causes big price movements.

What is Herd Behavior in the Stock Market?

Herd behavior in the stock market means that people follow what the majority of investors are doing. If most are buying a stock, others will also start buying, even without proper research. The same happens during a fall—when many sell, others panic and sell too. This behavior spreads quickly and drives large market movements.

How Does Herd Behavior Cause Stock Market Rallies?

When good news spreads or a few stocks start going up, investors begin buying quickly. Seeing this, more people jump in, thinking they will miss profits. This chain reaction increases stock prices even more. This is how herd behavior leads to stock market rallies, even if the actual value of the stock doesn’t support the price rise.

How Does Herd Behavior Lead to Stock Market Crashes?

During bad news or market panic, people start selling their stocks out of fear. This triggers others to do the same, thinking the market will fall more. As more people sell, prices drop quickly, creating a crash. This panic-driven selling is not based on company performance but on fear spread by herd behavior.

Why Do Investors Follow the Herd?

Investors follow the herd because they fear missing out on gains or fear losses. Many feel safe doing what the majority is doing. They think if so many are buying or selling, it must be the right move. But this often leads to wrong decisions, especially when done without checking the facts or doing proper research.

What Are the Dangers of Herd Behavior in Stock Investing?

Herd behavior can cause you to invest in overvalued stocks during a rally or sell at a loss during a crash. It creates bubbles in the market that eventually burst. You may end up buying high and selling low, which is the opposite of good investing. Following the crowd without understanding the market increases your chances of losses.

How to Stay Safe from Herd Behavior in Stock Markets?

To stay safe, always do your own research before investing. Set clear goals and understand your risk level. Avoid making decisions based on what everyone else is doing. Stick to long-term strategies and ignore short-term market noise. Focus on the fundamentals of the company and not just the trend.