In the investment world, if you clearly observe all the information is openly available and all you have to do is make the right decision of investment. According to the market theories, the increase in trading is efficient only when the flow of information is processed instantly and effectively.
The market consists of inefficiencies and efficiencies. The investor can make the right decisions and earn profits maximum when the markets are inefficient. The inefficiencies and efficiencies in the market are inevitable and markets are working mechanisms of the human mind and the computer programs which are managed by the individuals.
Investment decisions are made on the basis of behavioral aspects. These financial decisions are governed by markets, the sensitivity of the information, processing mistakes in information and others. All these form the base for finance behaviour, where the study is the combination of ‘psychological theory’ and micro and macro-level economics. The trading decisions are made on the behavioural aspects and behavioral finance makes the predicting decisions with the actual trade behaviour.
Here in this article, we highlight the four behavioural aspects which are recognised and are usually among the retail trading minds who do trading with broker assistance. The key remains the information presentation and the response of the human mind towards the content. When the investor gets the information, the response of the investor towards the decision making will be fast which will increase the investments. Below are the behavioural traps that you should avoid.
- Unusual self-confidence
- Never feel guilty
- Limited time
- Market trends
1. Unusual self-confidence
If the investor has good quality of information then he will act accordingly to the information sources. They will not analyze the information and take decisions with overconfidence. There are many studies conducted by the experts which show that investors with unusual self-confidence invest frequently. They do not build diversified portfolios as they keep investing only based on some source of information.
There are chances that all the investments that the investor has made may result in earning good returns. If the stocks begin to underperform then the investors will incur increasing losses throughout a period of time. The higher the investor is actively investing in the retail market, the lower are the returns earned.
How to overcome it?
By following the practice of trading less and investing more you can get the hang of your investments. Investing is based on data collected from the company analysis. Take time and analyse the data, spend time on researching the events of the industry you are interested in investing in, use the benefits of dividends and you will build good portfolios which will give you a better market place.
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2. Never feel guilty
If you have made any investment decisions which could have resulted in the loss and you were confident of the stock price going up then do not feel guilty. As you have spent a lot of time, analysis on making the right investment at the right time if it did not work well in your favor then do not regret.
You initiated the trade and if it did not work in your favor and you decided not to sell when loss was smaller. Later you realize the loss was higher than you expected then do not regret. It is still not a loss as you did not sell the stock. If it continues to work against you then you may end up in losing the majority of the profits.
Humans regret very much. If these mistakes are associated with money and especially with stock market investments then the loss and feeling of regret is immense. If the trade is locked in losses then the trades person will not have to be guilty.
How to overcome it?
Pre-set the rules for your trade and do not change the rules. Suppose, if a stock trade loses 8% of investment value then make the right decision to exit. On the other hand, if the stock price increases more than a level, pre-set a stop and this will put a hold and lock your trading gain. Do not trade with emotion but trade with this formula.
3. Limited time
For an investor there are many options for making the investment. The investors do not have sufficient time for research nor they have intention to do the research. They will make decisions based on the limited knowledge they have and the decisions should be made within the limited time. They make investments based on someone else’s judgment.
The investors will make investment decisions only on those shares which are advertised and shown on the websites, finance media, friends and family members. They do not spend time on their research. If the news catches the eyes of the investors then the investors will start investing and it creates bubbles which may crash at any time. Small news about the high performing stocks will not reach the media and they may be ignored.
How to overcome it?
News media will have its impact on stock market trading. Involve, research and learn the company developments and invest in the stock market. The information from the media can be used as a source of knowledge and do not completely rely on their advice for making investments.
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4. Market Trends
Predicting the future based on the past data will not always be possible. The market trends are subject to various analyses and various forces affect the performance of the stock indices. Humans determine and detect a pattern for investment and they invest accordingly to their assumption and patterns. The market trends are random and unpredictable. The investment decisions are mostly based on past performance. Based on the past performance the investors invest and market trends may turn out to be different.
How to overcome it?
If the investor has noticed a pattern of gain in the past it may or may not happen again in the future. Before you put the trade, keep watching the stock market read the values. If you find inefficiency then take advantage and go ahead with the approach.
Take away
The first step is to do research to avoid losses in the stock market. Set trading rules for yourself before entering the market. Do not trade based on emotions, it can neither sell the stocks nor purchase the stocks. Once the stock price increases, do not invest in the stock and similarly do not sell once the stock price falls. Always keep testing the water and work with a systematic approach.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
