Sentiments: X-Factor in stock market

If you can’t control your emotions stay away from stock market.

A Sage Once Said

Market Sentiments refers to the confidence of investors at a given point of time. Investors are humans and humans change their emotions regarding something very frequently. And stocks are no different. One good news people rush to pour all their money into stock and one bad news make them lose their mental peace and get all their money out. And these investors who cause the volatility in the market are generally responsible for their own lose as they are people who can’t control their emotions. Investing in market is like a committed relationship. If you don’t know when to appreciate your woman and when to show her your resentment you will end up ruining the marriage. Similarly, in stock market you must stick to a plan and learn to when to exit and when to enter an opportunity. And above all keep your emotions contained in a box and throw it into the river.

News

News is the primary driver for market sentiments. A person who invests with a plan doesn’t hurry to sell with one bad news. Professional investors first analyze the impact of a news before buying or selling the stock. In most cases professional investors end up buying a stock. Let’s understand this by a scenario. If a company is undervalued by the market and the company faces a legal suit. The market sentiment will turn negative for that stock and the price will start dropping. Now, a professional investor will first gather all the information about the lawsuit before the market opens. If he see that the company will eventually win the lawsuit he will short the stock in pre market session and buying hard right before the market closes.

This is where most investors fail. Most investors in the stock market today are common people who just wants to benefit from the wave of market without truly putting in this level of effort. And they all end up losing money. In the above lawsuit scenario most common people will choose to sell the stock as fast as possible. Same goes for positive news. If a common person hears a positive news about a stock they go on buy it without even checking the fundamentals. In the long run all these people end up losing a good load of money. And end up calling it fate.

Advisory

This is another big thing that impact market sentiments. Advisory from friends, family, self proclaimed financial advisors helps you lose a lot of money. You should never follow someone’s advice blindly unless that person gives you a proof of professional investment track record. Blindly following someone’s investment advice without your due diligence is the best way to lose a lot of money fast. Infact, I would recommend doing your due diligence even if you invest in a mutual fund. Is the mutual fund producing consistent returns? How is the mutual fund performing in economic crashes? These are some key questions that you should find answer to before investing even in mutual funds.

What should you do?

Sentiments can only be controlled if you have a good enough reason to believe that holding or selling at a particular point of time will not bite you in the future. There is only one way to build that confidence submitting undeniable proof to yourself. But, that is not possible if you don’t have time to research events, news, topics related to a stock. Most common people don’t have time therefor they should either chose fixed alternate investment like real estate. Or research once for a mutual fund and keep consistently investing in the same fund as long as it stops giving result. Or if you really want a better risk to reward ratio hire somebody who knows investment and work for you as a partner in your profit and a partner in your loss. When the person partners both in your profit and loss he will commit only if he is really confident about his skills.