Emotions is one of the biggest obstacles to making logical investing decisions in the stock market.
Over a short time span, the price of a company suggests the combined emotions of its investors.
When most investors worry about a company, the price of its stock is likely to decline. When most of the investors feel positive about the future of a company, the price of the stock is likely to rise.
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A “bear” can refer to a person that is negative about the market while a “bull” refers to someone who is positive about the market. As these two sides battle it out on the stock market, they affect prices. Many times these are caused by speculations, rumors, and hopes (all emotions) – rather than a logic and systematic analysis of the assets, prospects, and management of the company.
When the stocks are moving contrary to expectations, it is common for an investor to feel tension and insecurity created. You may find yourself asking:
“Should I be selling the position to avoid losses?”
“Should I keep the stock and hope the prices will recover?”
“Should I be buying more?”
However, when prices of the stocks are performing just the way you expected, there will also be questions.
“Should I take the profit before the price falls?”
“Should I keep my position because the pricing is likely to go higher?”
If you are relying on your emotions to answer those questions, you are likely to go wrong.
Instead, you should have a good reason for buying a stock and be clear of your target price if the reason is valid.
Your investing plan should also include exit strategies for when an investment turns out to be a mistake. This is even more important if the reason for you to invest in a stock becomes invalid or if the stock didn’t react the way you thought it will.