Investing on the stock market is associated with terms such as a ‘Bullish’ and ‘Bearish’ market. These describe how a market is performing at that given period. A bull run defines a market with prices on an upward trend. A bearish market means prices are on a downward spiral. Now, behind the bulls and bears of the market, investor decisions have an influential role to play.
Why Decisions Are Important When Investing
You stand a greater chance to make a good profit if you make the right investment decision. A good decisions starts with a deliberate choice to pick a stock based on company analysis. From this you decide on the right company to invest in, when to buy and when to sell. It is key to know that some decisions will be good and some will be bad but you still have to make decisions. Your efforts therefore should be focused on improving and refining your decision making process. You can do this by first understanding how other investors make their decisions.
We acknowledge that investors are human beings with certain behavioural patterns. These patterns influence our decisions which tend to sift into how money circulates on the stock market. Such behavioural patterns hover around loss aversion, a gambler’s fallacy, and regret aversion among others. It may well be argued by others that, the nature of investing on the stock market alters how investors make their decisions.
The Nature Of The Stock Market
On the stock market prices are on an upward trend with short term fluctuations characterised by rhyming patterns of highs and lows. In the midst of this, there are retail investors who react to policy announcements and immediate shifts in the economic environment. Investor reactions influence share price movement as they try to be loss averse and gamble for profit.
Loss Aversion
Investing on the stock market is risky. Do not listen to anyone who tells you otherwise. Now, in light of Zimbabwe’s unstable economic environment, most investors on the stock market have become very risk averse. Most investors will sell their shares when they are convinced that they might incur a loss. Such loss comes from sudden drop in share price because of an unstable economic environment. In some instances companies perform mergers and/or de-mergers which can have a material impact on holdings. Because investors anticipate a loss, they sell their shares.
The Gambler’s Fallacy
This is a desire common among investors seeking to make profits from anticipated change in market trend. Profit will come either by buying a share when prices are lower than normal and/or sell when its higher than the usual. This thought process drives share prices in instances when changes are made to the monetary policy. When companies announce structural changes, retail investors will react accordingly. Overconfidence in assuming that a trend will continue also influences how investors will buy and/or sell as they gamble for profits.
Getting The Right Information
Information drives decisions on the stock market. It is therefore rewarding to know where and how to find the right information. Where an investor has not furnished him/herself with sufficient knowledge to make an informed decision, loss is often imminent. This is because if you lack information about the future prospects of a company, you will react to the short term changes it might encounter.
It is therefore important that you invest in refining how you make investment choices. This will improve how you will select companies to invest in as well as knowing when to buy and/or sell.
