Explainer · Trading Psychology
FOMO and herding: chasing what already moved
When everyone seems to be making money on something, staying out can feel like losing. That feeling, the fear of missing out, is one of the easiest ways to buy at the wrong time.
Quick answer
FOMO trading means buying because you fear missing a chance to make money, not because of a plan [1]. Half of Gen Z investors in one survey said they had done it [1]. Following the crowd may lead to significant losses, and the SEC warns that fraudsters may exploit the feeling [2] [5].
Key points
- FOMO is the fear of missing out on a key opportunity to make money [1]; herding is following what the crowd seems to be doing [2].
- In a survey fielded in late 2022 and published in 2023, 50% of Gen Z investors said they had made an investment driven by FOMO [1].
- The SEC warns that following the crowd may lead to significant losses, and that short-term trading with margin or options can cause unanticipated ones [2].
- Buying after a rise from $10 to $25 and then seeing $15 is a 40% loss that needs a 66.67% gain to recover (calculated).
- Social media can fake a crowd: the SEC warns of paid promoters, false impressions of consensus and pump-and-dump buying frenzies [5].
On this page
What does FOMO mean in trading?#
FOMO stands for fear of missing out. A 2023 report by the FINRA Investor Education Foundation and CFA Institute describes it as the fear of missing out on a key opportunity to make money [1]. In trading it usually looks like this: a price has already risen a lot, people around you are talking about it, and you buy because waiting feels worse than the risk.
Herding is the group version. The SEC puts it plainly: it can be tempting to jump on the bandwagon and follow whatever the crowd seems to be doing [2]. A related idea is momentum investing, which the SEC describes as the belief that large price increases will be followed by more gains [2]. Sometimes that happens. Often the people buying last are the ones left holding the position when it stops.
How common is FOMO-driven investing?#
In November and December 2022, the FINRA Foundation and CFA Institute surveyed 2,872 people, including Gen Z investors aged 18 to 25, in the US, Canada, the UK and China [1]. Half of the Gen Z investors (50%) said they had made an investment driven by FOMO [1]. The share was highest in China and lowest in Canada, as the next table shows.
The pull is not limited to one survey. In the FINRA Foundation's separate 2024 survey of US investors, 13% reported buying meme stocks or other viral investments [3].
| Country | Share of Gen Z investors |
|---|---|
| China | 66% |
| United Kingdom | 55% |
| United States | 50% |
| Canada | 46% |
FINRA Investor Education Foundation and CFA Institute, Gen Z and Investing (2023) [1]. Gen Z here means investors aged 18 to 25.
What pushes people to invest on impulse?#
The same report asked US Gen Z investors which factors were a major influence on their decision to invest. FOMO was one of several. Friends and colleagues, and social media influencers, also scored high, and the most common answer was simply how easy it was to open an account [1]. The report itself says FOMO plays a role in Gen Z investment decisions [1].
Put together, the picture is of decisions shaped by other people and by how little friction there is. An app that opens an account in minutes, a friend who made money and a feed full of posts about the same asset can all arrive at once. None of that tells you whether the price is reasonable or how much you could lose.
Why is buying after a big rise risky?#
Buying after a big move means your entry is far from where the move started, so a partial reversal can take a large share of your money. The SEC warns that short-term trading, including trading with margin or options, can lead to significant and unanticipated losses, and that following the crowd may lead to significant investment losses [2].
The arithmetic of recovery makes it worse. Gains and losses compound, so a loss needs a larger percentage gain to get back to even: a 50% loss needs a 100% gain [4]. Our drawdown recovery page shows the full table.
- Shares bought with $1,000 cash plus a $1,000 loan
- 80 shares$2,000 / $25, calculated
- Your equity if the price falls to $15
- $20080 x $15 = $1,200, minus the $1,000 loan, calculated
- Loss on your own $1,000
- 80%calculated, before interest and fees
- Your equity if the price falls to $10
- -$20080 x $10 = $800, minus the $1,000 loan, calculated
Borrowing doubled the position, so the same fall did twice the damage. At $10 you would owe more than you put in, which matches the SEC's warning that with margin you can lose more money than you have invested [2]. In practice your broker would likely ask for more cash before that point: the SEC notes you may have to deposit additional cash or securities on short notice to cover losses [2]. See leverage and margin explained before using either.
How do scammers use FOMO?#
The fear of missing out is not only a personal bias. It is a tool. The SEC warns that fraudsters may exploit investors' fear of missing out to lure them into crypto investment scams on social media [5]. Social media can give a false impression of consensus or legitimacy, making it look as if large numbers of people are buying [5]. Fraudsters sometimes pay actors posing as ordinary people turned millionaires, influencers and celebrities to promote an investment [5].
A classic version is the pump and dump: false and misleading statements push up the price to create a buying frenzy, and then the promoters sell their shares [5]. In the romance-style scams the SEC describes, the fraudster then tells the victim to invest larger amounts and conveys a sense of urgency [5]. Our guide to crypto scams lists more warning signs.
How can you slow down before a FOMO trade?#
The SEC's advice is direct: never make investment decisions based solely on information from social media, and do not be pressured to act quickly [5]. The steps below turn that into a routine. They are practical habits; none of our sources tests whether they change results.
- Name what you are reacting to
Is it a plan you made before, or a price move and other people's posts? If you only noticed the asset because it went up, say so.
- Wait before you act
Set a rule, such as not buying anything on the day you first hear about it. Urgency is a warning sign the SEC links to fraud [5].
- Check the source, not the crowd
Find out who is promoting it and whether they are paid. Look for primary information, not reposts.
- Decide the loss first
Pick the price that would prove you wrong and use position sizing so that loss is an amount you can afford.
- Skip margin on a hype trade
Borrowed money turns a bad entry into a much bigger loss, as the worked example above shows.
Mistakes beginners make with FOMO trading#
- Treating popularity as proof
Lots of posts can be fake consensus. The SEC warns that social media can make it look like large numbers of people are buying [5].
- Buying because the price already rose
A big past rise tells you where the price was, not where it is going. Your risk is measured from your entry, not from where the move started.
- Going all in at once
Putting a large share of your money into one hyped asset leaves no room for being wrong. Size the trade from the loss you can accept.
- Letting someone else set the deadline
"Last chance" and "before it moons" are pressure, not information. Being rushed is a reason to stop.
Frequently asked questions#
Is FOMO the same as momentum investing?
Not quite. Momentum investing is a belief that large price rises will be followed by more gains [2]. FOMO is the emotion that pushes you to act on a move without a plan. The two often appear together.
Do FOMO trades usually lose money?
We do not have a primary source that measures the results of FOMO-driven trades, so we cannot give a figure. The SEC does warn that following the crowd may lead to significant investment losses [2].
Why is social media so risky for investment decisions?
What should I do if I already bought something because of FOMO?
Treat it like any other position: decide now what price would prove the idea wrong and how much you are prepared to lose, and write it down. Do not add more just to lower your average price.
The bottom line#
FOMO feels like an opportunity slipping away, but by the time a move is popular, much of it has often already happened. Buying late puts your entry far from the start of the move, and borrowing to do it multiplies the damage when the price turns. Slow the decision down, check who is behind the hype, decide your loss before you buy, and remember that urgency is a tactic fraudsters use. Use only money you can afford to lose, and read the risk disclosure before trading anything with leverage.
Sources
- Gen Z and Investing: Social Media, Crypto, FOMO, and Family.
- Investor Alert: Thinking About Investing in the Latest Hot Stock? Understand the Significant Risks of Short-Term Trading Based on Social Media.
- Investors in the United States: A Report of the National Financial Capability Study" (2024 Investor Survey).
- Downside financial risk is misunderstood.
- Social Media and Investment Fraud - Investor Alert.
Education only. This page is not investment, tax or legal advice. Trading and crypto can lose you money. See our risk disclosure.
