The Mentality of the Stock Market
"Has been a lifesaver so many times!"
- Catherine Rampell, student @ University of Washington
"Exactly the help I needed."
- Jennifer Hawes, student @ San Jose State
"The best place for brainstorming ideas."
- Michael Majchrowicz, student @ University of Kentucky
The Mentality of the Stock Market
If playing the stock market were an easy game, everyone would be rich. Whether an investor to chooses invest very actively, or long term, it is a game of mentality. During a economics course in college a professor will fill the board with algebraic expressions & economic gibberish, intended to explain exactly how the financial markets work. And if every investor were 100% rational; everything learned in financial economics would be true. The fact of the matter remains, very few people are rational when it comes to their finances.
Anyone who purchase stock does so with the intent of getting more money back than they put in, the question is how does one go about deciding what stocks will be the big winners. A novice investor might go with a recommendation they read in an investment magazine or off of a web site. Another common choice is to ask their broker, a broker who gets most of their investment opinions from their firms analyst. Not that analysts are bad but they usually change their opinion on a company the day after a company releases good or bad earnings, in other words their recommendations come about one day late. A more informed or confident stock trader may call the company and ask them to send a quarterly report so they can look over the company's financial figures, and find out who holds most of the stock. If a large portion of the company is held institutionally, bad news can hurt the stock dramatically because institutions tend to sell at the first sign of weakness, which might be 50% of the outstanding shares. Another source for trading information would be the company's recent press releases and how they have affected the stocks price. The company might come out with a press release saying their earnings for the previous quarter were better than expected, consequently the price of the stock will rise, or they might come out with a press release saying that their being sued for 300 million dollars and that would most definitely have a negative affect on the stock.
They mentality of a very active trader can be somewhat different. Active traders watch the company press release and rumors very closely. They don't react directly to the news itself, their reaction is more of how they think other investors will react to the news. They might hear a rumor that Intel is going to announce the release a new computer chip, so they'll purchase the stock and as soon as the announcement is made the stock will rise in price considerably. The downside to this type of trading is that sometimes it back fires. A good example of this happened in February, a company announced after the close of the stock market that they were going to begin testing a possible cure for cancer. A lot of investors put in orders to buy stock at the market open. Before they made the announcement the stock was trading at about $20 a share. The stock opened at $80 a share. So instead of buying a 100 shares for $2000 they ended up paying $8000. Active traders trade anywhere from once a week to numerous times a day. They only need a small increase in the price of a stock. If they can sell it for 1/16 of a point higher than what they bought it that might equate to $200, not much of an increase to a long term investor, but for an active trader if they can do that a couple times a day their satisfied.
The majority of investors sell their winners to soon and their losers to late. The fact is, what drives a lot if investors is not simple, rational greed, but a desire to avoid feeling stupid. People would rather do nothing than do something and risk being wrong. Everyone's portfolio is filled with regret. And when they are again stuck with a losing stock; it is that fear of regret that makes them hold onto it as it's value plummets. Nobody wants to sell a stock for a 25% loss. Instead they watch it go from a 25% loss to a 50% or 75% loss, sometimes more. The stock may come back, but
View Full Essay
Stock market, Financial markets, Commodity markets, Capitalism, Stock trader, Stock, Order, Futures contract, Day trading, Stock exchange
More Free Essays Like This