Market sentiment refers to the belief that the majority of investors have about the stock market. Market sentiment can be responsible for large swings in the momentum of the buying and selling of stocks. Sentiment can be influenced by a vast number of factors.
In most developed countries, shares of stock are sold on a stock exchange. Shares of stock refer to small pieces of ownership in public companies. Stock prices fluctuate up and down as they are sold, depending on what people are willing to sell the stock for — called the ask — and what people are willing to buy the stock for — called the bid.
A share of stock in a given company is determined in part by the perceived value of that company itself. For example, if a company has a low price-to-earnings ratio, that means the price of a single share of stock is relatively low in comparison to the amount of money the company earns. This could make the company an attractive buy for investors and stock prices may be driven higher.
The price of stocks as a whole is also driven by market sentiment. If the vast majority of investors believe that the economy is doing well, for example, then the market sentiment will be positive, as these investors will believe that the value of companies is going to continue to rise.
If, on the other hand, investors believe that economic trouble is on the horizon, then these investors will likely think that the value of a company may fall. As such, the stock market as a whole may go down as investors think that the price of each individual company is likely to decrease and thus sell off their stocks or make bids at a lower price for a given stock.
Market sentiment is described by several different words. For example, a bull market is a market in which the vast majority of investors believe that stock prices are likely to go up. As a result of this positive sentiment, the shares of individual companies may be driven up and the value of all stocks traded in the stock market may likewise go up. On the other hand, a bear market is a market in which investors believe that things are likely to go wrong. This type of negative sentiment can drive prices of stocks down and can cause the stock market as a whole to drop.