The Psychology Of Stock Investing

Being successful in the stock trade is not as difficult as it may seem, but then why are some people more successful than others? The simple answer is being human.

Professionals in the industry claim that success is more about acknowledging and overcoming your psychological weaknesses as a buyer. People tend to rationalize their irrational purchases and go with the flow without realizing they poured their money down the drain.

To deal with the right side of their brain, investors should follow a proven strategy that has made others rich.

Emotions

The most prominent emotions that greatly influence investment decisions are fear and greed. Greed prompts investors to buy stocks with a rising value that may not stop to consider if they can afford such a purchase. Alternatively, some will gamble and buy risky stocks at low prices solely focusing on the possible financial gain and neglecting their investment plan.

Fear also causes investors to make bad and rash decisions about their stocks. For example, they invest in a company they believe will make them a profit and when the price of the shares falls, they panic and sell, not thinking that this could be a temporary thing like it often is. These emotions have a short-term impact on the stock market thanks to the herd mentality.

Sheepish Behavior

One of the first things many are taught as they grow is to follow the crowd. People have this innate herd mentality and feel great discomfort when they think about breaking out of this behavioral pattern, mainly because if the herd is wrong then it wasn’t their fault. This comes from lack of confidence in your own research, objectives, and often, following the herd will lead to a cliff.

For example, trading in penny stocks will frighten many due to many scams and their volatile nature but then many have made millions by trading in penny stocks and staying true to their investment plan. If investors base their actions on the behavior of the majority and not their knowledge, they will most likely lose in the long run.

Destructive Behavior

Many like to believe they are more competent and smarter than the rest of the world, and though optimism can lead to a positive effect, this is not always true for investments. Confident investors will trade stocks more rapidly which often doesn’t give the desired financial result. Also, selective memory is a basic human defense mechanism where we tend to erase painful memories. This behavior is something overconfident investors need to look out for since the more confident you are, the less you’re willing to accept your mistakes.

Self-handicapping is another way humans try to save face. Investors will give reasons for a potential bad investment decision and suffer financially because of their reasoning. Also, latching on to a company is the biggest mistake many investors make. They will become emotionally attached to stocks that have made them some money and will not sell them even though (over the course of time) their earnings dropped significantly. Investors think that by not selling their stocks they have not lost any money, but by doing the math and looking at other possible investments they can see the missed opportunities.

Understanding destructive human behavior and honestly evaluating your decisions will help you reach your financial goals. Every investor should look for these flaws in their behavior and try not to base their decisions solely on them. You can always turn to advice from professionals if they feel conflicted.