Emotional stock market
Emotion is ever present in the stock market. Feelings do not discriminate among amateur and professional investors despite the fact that some people have more practice than others at keeping their emotions in check when making financial decisions. Nonetheless, positive and negative feelings do creep into the stock market and have an effect on stock market performance. These emotional extremes can trigger irrational decision-making that costs investors money, while in some cases joy can actually work to a stock's advantage.
There is an emotional pain that is associated with financial loss that can cause investors to continue holding losing stocks out of fear.
Emotional investing is not limited to the small investor, either. Indeed, investment professionals, such as traders, struggle with emotion -- including fear -- when navigating the stock market, too.
Professional traders are often cognizant of their weaknesses, however, and have strategic measures in place to help them control their fear of financial loss. The stock market, by nature, is volatile. This means that stocks can exhibit extreme price swings that can make investors uneasy. Market volatility is blamed for causing investors to make ill-timed, emotional investment decisions instead of using logic, often leading to disappointing results. In the two-decade period beginning in , for instance, emotional investing led investors to earn an average annualized profit of 2 percent, while the broader stock market advanced nearly 8 percent, according to BlackRock.
Emotional investing can occur in an individual stock just as well as it can permeate the entire stock market. Euphoria is said to be the emotion that drove the price of technology stock Apple higher by about 75 percent over the course of several months, according to CNBC.
Eventually, investors started paying more attention to the company's financial fundamentals than their feelings, which had been driving the price increase, and Apple's stock began a sharp descent of about 10 percent. Emotional attachment, technically known as an "anchoring bias," can cause investors to continue owning shares of doomed stocks.
These feelings of attachment can develop for various reasons, such as placing too much emphasis on a single catalyst that led to the investment decision in the first place. Emotional attachments can also form based on an expectation for a stock to reattain a particular threshold, a steadfast belief that may never materialize.
As a result, emotional attachments can cause investors to hold into stocks until they are worth nothing. Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times.
Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.
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These returns cover a period from and were examined and attested by Baker Tilly, an independent accounting firm.
Visit performance for information about the performance numbers displayed above. Skip to main content. What Is an Abnormal Rate of Return in the Stock Market? How Low Can the Stock Market Go? Do IRA Accounts Invest in the Stock Market? Fear There is an emotional pain that is associated with financial loss that can cause investors to continue holding losing stocks out of fear.
Bad Decisions The stock market, by nature, is volatile. Euphoria Emotional investing can occur in an individual stock just as well as it can permeate the entire stock market. Emotional Attachment Emotional attachment, technically known as an "anchoring bias," can cause investors to continue owning shares of doomed stocks. References 3 The Wall Street Journal: The Mistakes We Make — And Why We Make Them BlackRock: Volatility Propels Emotional Investing CNBC: Behind Apple's Selloff -- 'There Was So Much Euphoria'.
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About the Author Geri Terzo is a business writer with more than 15 years of experience on Wall Street. How the Oil Price Affects Utility Stocks How Can I Practice on the Stock Market? Related Articles What Happens to Dividends in a Stock Portfolio? Government Regulations on the Stock Market How to Invest in a Rising Stock Market Who Are the Major Investors in the Stock Market?
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