The Herd Behavior and Investments
The psychology of investing
Most of the reasons that make people lose money in the stock market are psychological. Out of every 100 mistakes made by investors 99 are a result of emotional decisions. If you learn how to control your emotions and how to have self discipline your chances of making money from stocks will become very high and you will most likely become a successful investor. (see the psychology of investing)
The herd behavior and investments
The herd behavior is the act of following the crowd in whatever they are doing even if you don't have enough information about the stock you are going to buy. Some people rush into buying just because everyone around them is buying and some run to sell just because everyone around them is selling. What's funny is that most investors fail to beat the market index and most fail to protect their money from losses, but still follow each other blindly.
Usually when everyone sells their stocks because of fear, the market reaches very attractive valuations that allows investors who bus at that time to make good profits. On the other hand when everyone buys stocks out of excessive optimism the stock market becomes overvalued and major investment institutes start to exit their positions, thus causing major losses to those who bought stocks at these expensive valuations.
Why do people influence your investing decision?
In the investment world, there are two main reasons for believing in others more than believing in yourself, lack of self discipline and lack of knowledge. Lack of self discipline will let you follow your emotions without being able to control yourself from buying or selling, and lack of knowledge about a specific stock might let you buy it without being aware of its bad financial position.
If you want to protect yourself from getting involved in herd behavior, do your homework by researching stocks well before you buy them and develop self discipline, only then you will be able to control yourself when others lose control of their emotions. One final thing, if you discover later that everyone's net gains are positive then forget about this article and follow them, but what you are going to discover is that most of the people you are following are either losing money or not making good profits.
About the Author:
Want to have a solid and practical investment knowledge?
Check out:
www.theway2invest.com