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Major factors that contribute to losses in stock market

Updated on 28 February 2018

Most of the times, unexpected gains and profits in stock market are attributed to the volatile nature of the market. The stock market is unpredictable and is subject to ups and downs. Many of the investors are in a state of constant turmoil with diverse emotions because of uncertainty. In an inflationary period, all investors fear the risk of losing the money. Whereas, in a deflationary period, they love to enter the markets to make a large profit. They express emotions at different stages of market status that constantly moves between bullish to bearish trends. These investors are greenhorns mostly, having a set of emotions attached to their investment’s growth as they expect quick results.

Stock markets may go up or down but ideally, an investor need not readjust the portfolio based on the whims of the market. Once focused on certain portfolios, different kinds of noises will try to off-track them. Therefore, chalking out a strategic investment plan and sticking to it becomes the basic rule of the game.

Interestingly, a cycle of emotions drives most of the new investors. Market trends on the fluctuations, however, emotions of the investors change as per the market trends. Different investors react differently towards the market fluctuations. Some choose to walk away while other stay put. Here is an interesting analogy drawn between Trading Psychology of the ambitious investors and changing market trends.

Stock Market & Trading Psychology of Investors

Positivity - The ambition is the basic sentiment of the investors who want to put their money to make money from the stock market. Their positive frame of mind drives them for investment in stock.

Elation - If the investment reaps profits; their elation becomes a motivating factor that allows them to invest more in stocks.

Exuberance - An investor’s dream is to gain more out of their investment. If they earn, their excitement is boundless. In fact, they believe in themselves as smart ones and flaunt their newfound status. That is when an investor is more than ready to put more money out of excitement. Here other people of the same wavelength would follow the suit.

Jubilation - Just like a gambler who is high on winning spree, the investor earning more and more money think that nothing can stop him. Out of the jubilation, they fail to notice the risks at that stage. They rely on hearsay, intuition, personal findings, media, and their past profit-making splurge to invest more to make more profits.

Nervousness - The stocks dip and these investors show nervousness by exclaiming their negative emotions. However, the investor does not walk off but stays firm with the hope that market will recover.

Patience - Although bear run is on; these investors are patient and console themselves that in long run the trend will be bullish. They hold the fort and do not touch their investment, without hitting the panic button.

Distress - Time to see the stark truth glaring at them, as they look at their investment with disappointment. They keep on discussing with their fund manager and broker to discuss its future. They stay in front of the TV always, distressfully waiting for a miracle to happen.

Miserable - As the investor continues to watch bearish downtrends, the desperation rises to the miserable feeling of deprivation of profits. Investor is ready to consult anybody, so he could recover the losses. However, profitability still loomed large in the vision so investors are still able to sit tight and wait.

Fright - The bear run continues at the same pace and there is hardly a moment of reprieve. A fright engulfs the investor who regrets and curses his intuition or the friend’s advice to invest.

Surrender - Now investor seriously ponder overselling the stock, he is on the verge of surrender to the fate. The friends and families really get worried about the investor’s state of mind. Investor succumbs to the pessimistic notion; probably this business not cut out for him.

Disheartened - Very heartbroken, the investor is disheartened and sell off the stock at a great loss. This ends up as a salvation effort than investment deal. Already burnt fingers, the investor is apprehensive and stay away from any investments in the stock market. The word ‘stock market’ becomes a taboo and he refrains from even mentioning it.

Dejection - Many of them who burnt their fingers get into the self-examination mode. They realize their mistakes and prepare themselves to jump in, one more time. They had learned their lessons hard way, so it is the time for them to look forward for some exciting prospects and invest by analyzing to make profits.

Optimism - Thankfully now the market is looking up and displaying uptrends, investor put his money into few chosen stocks.

Respite - the Bullish stock market is back on track and investors putting more of their money in stocks to earn profits. The respite now gives way to more investments in stocks. It is a wheel that keeps on moving up & down, up again, and so on.

A smart investor, who learns from own and other’s mistakes, realize the emotions and this business cannot survive together. The investor needs to understand how he can make right investments in Stock Market, devoid of different shades of emotions.

Ways to check emotions

The crux of the matter is to understand how one can by-pass the emotions to make a firm and correct business decision. Firstly, accept the various colors of emotions and understand how they impact the crucial decisions. Though it is impossible to delete them from the system, an investor must learn to manage emotions so they do not interfere with intelligent financial decision making.

Here is a reality check of emotions and the damage they cause

Spontaneous Decision - The decision taken on impulse at the heat of the moment with more spontaneity but less thought process is unfit for the stock market business. The stock value goes down a little and jittery investor sells off the stock fast to avoid loss.

Unbalanced reaction - When a stock goes down or goes up, the investor's mood also changes from sense of great loss to celebration.

Follow news and broker - You are an emotion’s victim if you always follow stock market news and keep on calling your broker with undue anxiety.

Ways to avoid the losses on stock market

  • One needs to manage the emotions to make right decisions at the right time.
  • Yoga & meditation
  • Look for the long-term stock buying program and stick to it, after watching all its pros & cons.
  • Understand in depth about a stock before buying it and consider the risk involved.
  • It is an ever-changing world and past performances cannot be the guarantee of safe investment.
  • Focus on buying only quality stock portfolios and keep a tab on them as per market fluctuations.

Conclusion - Hire a good financial advisor to act as a guide for imparting calculative and emotion-less information regarding stocks. The right financial advisor shows the path of rational investing irrespective of market volatility.