Do you want to earn a higher return from stock investments? Are you keen to avoid losses from stocks? You must control your emotions when trading in the stock market. Stock trading is risky, and emotional investing increases this risk as you are not in control of your investment decisions. It helps if you learn the strategies to control your emotions while investing in stocks. Let’s look at ways to stay in control of your emotions when trading in the stock market.
What is emotional investing in stocks?
One of the most common emotions you feel when investing in stocks is fear. For instance, FOMO or the Fear of Missing Out, has led to investors suffering severe losses in the stock market. It happens when there is a massive rally in the stock market.
If you are a stock trader, you will feel the anxiety of missing out on a stock market rally as you perceive that other people are profiting from it. Another emotion you must control is greed when investing in stocks. It leads to investors paying a much higher price for shares than their actual value, thereby increasing the chances of potential losses in the future.
Investors who fall prey to the herd mentality can suffer losses in their stock investments. It is the tendency for stock market investors to copy what other investors are doing.
For instance, many investors in stocks follow the investment choices made by other investors and enter overheated stock markets poised for a crash. It leads to severe losses in stocks that can take years to recover if you enter the stock market at the wrong time.
Many stock investors fall prey to the loss-aversion bias. It means you prefer avoiding losses in stocks rather than focusing on gains from stocks. For instance, studies show the pain of suffering losses in stocks is twice as intense as the pleasure of profits from stock investments of a similar magnitude.
It leads to inaction, and investors continue to hold on to losing stocks as they don’t want to suffer actual losses. Investors hope these stocks will do well in the future and they will recover their investments.
How to control your emotions when trading in the stock market?
Investors who allow emotions to dictate their stock market trades may suffer heavy losses. It leads to desperation where investors indulge in revenge trading to overcome stock market losses as soon as possible. You could indulge in random stock trades where you suffer more losses, eventually affecting your health and well being. You can avoid these problems by being in control of your emotions when trading stocks.
You must invest in stocks to attain your long term financial goals. It helps to do your due diligence and invest after research to avoid emotional investing in stocks. You must formulate a strategy based on your financial needs and risk tolerance which helps you to keep emotions under control.
You must avoid market noise if you want higher returns from stock investments. The minor stock market movements, data, or financial news distracts investors from actual market trends and underlying stock value. Market noise leads to knee jerk trading, where you make irrational decisions to buy, sell or hold stocks, thereby impacting your stock portfolio.
You have to filter out market noise by understanding the difference between noise and information. For instance, information provides evidence on why you should invest in a particular stock. Market noise adds to the confusion and leads to investors making the wrong investment decisions.
It would help if you focused on diversifying your stock portfolio across sectors and industries. It protects your portfolio if one or two market sectors underperform. Moreover, you must study stocks and market trends and understand how the stock market works before you start your investments. Don’t invest in stocks based on word of mouth or hot stock tips but do your research before committing to the investment.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
I write to make complicated financial topics, simple. Writing is my passion and I believe if you find the right words, it’s simple.
