The stock market entices more retail participants with the ease of investing. But they cannot dive into the market without an investment plan. Investments performing well can make investors feel invincible with emotional lows and ups. Therefore, they need to strategise their investments to avoid the impacts of behavioural factors, like greed, excitement, fear, and cognitive accounting on their investments.
Emotionally based investing decisions
Investment decisions are greatly influenced by behavioural factors. Individuals who listen to their guts and allow their emotions to dictate their stock investment decisions must suffer losses. Many times, overconfidence and conservatism impact the investors’ decision-making hugely.
Let us discuss two types of emotional reactions that can influence average investors adversely:
- Fear of Missing Out (FOMO): Many investors chase securities that appear to rise due to the fear of missing out on making profits. It leads to speculation without an investment strategy. It might end up holding valueless stocks when the craze declines, especially for inexperienced investors.
- Fear of Losing Everything (FOLE). It is a more powerful emotion than FOMO as investors have fear of losing all their investments. When market volatility increases, investors can get nervous, they sideline their investments due to a fear of a stock market crash.
Like many investors, you can open multiple demat accounts to segregate your investing and trading portfolios.
What is Demat Account: You need to know the what is demat account before investing. It is an online repository to store your financial assets securely in digital form.
Multiple Factors Move Markets
Global news and the speed at which information is disseminated can increase market volatility in no time and markets start to get exaggerated reactions from investors. Interest rates are also a key driving force of stock markets. Rising rates dampen stock prices. Many investors do not realise the effect of changing rates. These can be non-manageable conditions for many individuals following behavioural or psychological factors. There are ways in which investors can make rational investment decisions in any market environment.
How to make better investment decisions in the stock market
Rational behaviour is essential to succeed in the stock market. Individuals can adopt optimum stock investment strategies by avoiding psychological errors. For cost-efficient investing, most investors consider discount brokers to open demat and trading accounts. The key difference between demat and trading account is their functionality. Unlike demat accounts, a trading account connects you with multiple exchanges through the broker’s trading platform.
Increasing the rationality of investment decisions is necessary to gain from the market. But investors are humans and not machines. Often, they can be swayed by emotions. It is a big issue in the investing world, especially in stock markets, as they are accompanied by inherent volatility risk. Here is what investors can do:
- Diversification with defined goals
One of the fundamental investing rules is having a well-diversified portfolio. Skilled investors or investment managers can build the best risk-adjusted portfolio consisting of securities from different sectors for a greater balance and significant returns. Diversification based on your defined goals and budget mitigates the risk. You will not change the investment proportions just by following your emotions due to a market fluctuation. But it will be a rational decision to meet your defined financial goals.
- Stagger buy and sell decisions.
Staggering buy-and-sell trades is another tact that investors can use to restrict emotional investing. Suppose you want to buy 400 shares. But following a prudent approach, you might purchase 150 shares at the current price. In the next buy order, you can buy shares at 20% below the current price. If the stock price increases after the first trade, you can book profits on 150 shares and may buy more shares, thereby divesting the FOMO effect.
Thus, investors need to be aware of the impact of their psychological factors on their stock investing decisions. They must take these behavioural factors into account as risk factors while making investment decisions and need to be rational about investing.