EMOTIONS IN SHARE MARKET
Does anyone really understand the stock market
or is it just a mob mentality. Where people are fascinated by something and end
up following a crowd. Firstly you have to classify yourself from them otherwise
you will end up in losing a lot of money.
Most of the people do not understand stock
market, the stock market is actually based on rational principles and it has no
place for emotion. For example marrying a stock position is a huge mistake people
sometimes make - just because the stock gave you solid returns in the past does
not imply it will continue to do so. If the price drops drastically (5% or
higher) on some news, look carefully at the news - if it’s something
idiosyncratic, it might be time to reduce your position - or just exit
entirely! The same thing applies if you see some other stock that looks more
promising and you need to raise cash - you don’t have to pay alimony!
Regular monitoring of your portfolio is
necessary for navigating the changing tides in financial market and it is also
essential for investor to manage his psychological behavior while buying and
selling in ups and down of market.
It is seen that people regret their decisions in ups and down of market where they overreact to situations in market.
A non-professional investor is typically
putting hard-earned money in investments for the sake of receiving good return.
Still, they see their investments lose value due to market developments at times.
The losses can cause anxiety, stress and second-guessing. That is, many
investors have a relatively low risk tolerance when it comes to investing
because losing money is painful.
In bull market scenario the excitement
might lead the investor to try to obtain gains from investments that are
emerging due to bullish market conditions.
And in case of bearish market when
investors read news about a bad economy or hear reports about a volatile or
negative market period, fear for their investments can leads to sell their
shares. Bear markets are always lurking around the corner and come with many of
their own caveats that can be important for investors to follow and understand.
How can one measure the level of fear or
greed in the stock market?
There are several market sentiment
indicators one can look at, but two specifically interrogate the emotions of
fear or greed. The CBOE's VIX index, for instance, measures the implicit level
of fear or greed in the market by looking at changes in volatility in the
S&P 500. The CNN Money Fear & Greed Index is another good tool that
measures daily, weekly, monthly, and yearly changes in fear and greed. It is
used as a contrarian indicator that examines seven different factors to
establish how much fear and greed there is in the market, scoring investor
sentiment on a scale of 0 to 100.
What are some trading strategies to keep
emotions in check?
Having an investment plan and sticking to
it is the best course of action to avoid the sway of emotion in trading.
Passive index investing, diversification, and dollar-cost averaging are all
fairly easy ways to maintain objectivity.
Investing without emotion is easier said
than done, but there are some important considerations that can keep an
individual investor from chasing futile gains or overselling in panic.
Understanding your own risk tolerance and the risks of your investments can be
an important basis for rational decisions. Active understanding of the markets
and what forces are driving bullish and bearish trends is vital as well.
Overall, while there are times when active
and emotional investing can be profitable, data shows that following a
well-defined investment strategy and staying the course through market
volatility often results in the best long-term performance returns.
INVEST VIA : ZERODHA THE LARGEST RETAIL BROKER
0 Comments