Investing into the stock market is no child’s play as there are lots of factors that play a guiding role and psychology is one of them. Here are 5 major psychology traps that an investor or trader must avoid to yield great outcomes.
Psychology is known to play a major role in whatever steps we take in our lives, including investment in stocks. Often, our belief in psychology is effective and sometimes it is not. When psychology is not accommodating, it is known as psychology traps. Investment in stocks is also driven by few psychological traps that affect traders and investors in making inappropriate investment choices and losing money.
Since in most cases, we are not conscious of our psychological composition which guides us in taking bad investment decisions, odds are we keep on reiterating such mistakes. If we are aware of them the probability of bad investment decisions decreases significantly. Let us look at some of these common psychological traps in which investors are found to get entrapped.
Trap no. 1
Being a blind follower
Most of us love to be in the comfort zone, they get devoted to some of their selections of businesses in which they have already invested. In the 1990s, UTI was the largest and most popular mutual fund in India and its products were quite popular. One of its products, ‘Master Share’, when registered, increased to unprecedented levels and many investors made money. Many investors have become the blind fans of the UTI brand.
UTI then launched their next product, ‘Master Gain’, people who were chained into UTI threw caution to the wind, forgetting it is a mutual fund offering, invested in hordes. When registered, it opened below par and stayed there for a long time. All those investors who were attached to UTI lost money. At present, UTIMF is one of the ‘closed’ mutual funds companies.
To overcome this kind of trap, an investor should be flexible and stay aware that s/he is not getting involved in stocks/companies and keep on watching its performance impassively and understand when to withdraw or decrease exposure.
2. Getting confirmation from others
A majority of investors while confirming a stock, consult fellow investors, and get such opinions which approve their own choice and cast off the conflicting views. Best stock broker in India Such discerning approval often causes bad decisions, but the investor holds on to it as his/her choice has been verified by other investors.
Avoiding such traps will be realizable if the investor while getting approval from other fellow investors should be sensibly looking into the history of these investors. Interchangeably, the investors may take into account both supportive and contrasting views and then make the decision to invest or not.
3. Preferring junk stocks
Typically, people tend to go with their investment decisions and adhere to shares, whose market value has reduced and instant chances of recovery are low, but will not take decisions either to withdraw or lessen their exposures.
They hold on to this confidence that their past decisions of these investments were dependable, and the stocks will turn around. Most investors have such shares in their portfolio , which they keep on tight fitting to despite incurring losses with no chances of recovery in a predictable future.
Medicine from this trap lies in taking a separate view while studying the portfolio, taking decisions on market realism and evading the ego trip.
4. Loss Aversion
Humans don’t like to lose. We did to a level that various studies have recommended losses have twice the influence, psychologically speaking, as gains. This can lead to illogical decision-making, whereby individuals will go to unusual lengths to uphold even the thinnest opportunity of winning.
The consequences for investors are understandable. Holding on to a stock, asset or other investment for extended periods of time, despite its declining worth, can harshly damage a portfolio. Smart investors know when to reduce their losses and channel their money into avenues that carry a better chance of giving returns.
5. Weather watching
Periodic moves in the weather have long been known to influence our mood. Sunshine and blue skies bring out the best in a majority of people, whereas rainy, cloudy days are often associated with fate and gloom.
The top brokers in India have found that weather can also have an influence on people’s investment decisions. They found that even expert investors were more supposed to buy stocks when the sun was out, while cloudy circumstances caused folks to evade risking their money.