Is the stock market based solely on the emotions of investors?

Question

Cajun: But what's so common about common sense if only a mere 2% out of all stock investors actually know how to invest? If this was common sense then I would be glad to be called a Warren Buffett or a Peter Lynch.

Answer 1

Indeed emotions play a very large role in the performance of the stock market.  Certainly, more of a role than common sense.  Currently,  the market is driven by fear.  Fear that the economy is coming completely unglued.  On second thought perhaps that is common sense.  It is coming unglued.  Behind the emotions there is usually some common sense rational factor that triggers the emotion.  Right now it is the rise in the price of oil and the incredible greed of the Wall Street bankers and their supporting staff  that precipitated the mortgage crisis.

Answer 2

greed

Answer 3

there many factors including emotions. why would I want a broker manage my money. thay all are broker than me and a becomming broker and broker every day.

Answer 4

No. Short term the market moves on rumor, inuendo, and emotion. Long term it moves on fundementals and more logical information. You can see that if you look at people that invest long term and get much better results than those that invest based on thier emotions.

Answer 5

I would say, it's more based on the Confidence of the Investors in relation to how successfully the Market the Company is trading in is (i.e. if the company is trading in high cost luxury items... when their's no money People are going to be less interested in buying them)

Also how the company has performed in the Past, what type of future plans the company has.... and also how the people who are running the company are performing

Answer 6

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Answer 7

The stock market is not based on emotions of investors

Professional investors and tradings do not buy and sell on emotions, nor do they let their emotions enter into any of their decisions.  Only amateurs buy/sell with emotions.

One of the major rules for trading/investing is never buy/sell with emotions, wether it be fear, greed, hopes, etc.

This is why experienced investors never "marry" a stock, when their position does what they want it to do, they get out or if the position doesn't work out, the sell with a small loss.

Answer 8

No. I assume you mean the values of stocks etc. Emotion is one of many contributory factors.

Answer 9

It is based on "news"

Answer 10

No, it is based on the BELIEF of the investors that the stock will go up or down.

Just like the value of money is based on our BELIEF that it is worth something.

Answer 11

NO

Answer 12

You replace 'solely' by 'partly' and add 'in the short run' and I think you have a right answer . If it was the case, then trading would be much easier for someone who can retain their emotions and/or for a trading model that recognizes human reactions to news and movements in stock prices.

Behavioral finance argues, against the assumptions of classic theories, that investors commit the same kind of 'mistakes' systemtically. Systematically means that these mistakes by individual investors do not cancel out (against the assumption that errors are random therefore we can forget about them). This as a consequence skew prices. They argue that bounded rationality (limited processing abilities, information, time and cognitive biases) coupled with prospect theory, loss aversion effect, disposition effect, illusion of control, overconfidence all play similarily for most investors that it determines an overall market behavior (such as panic, greed ...) And these "mistakes" can be exploited with no regard to real company-related information. Even experienced traders or brokers are subject to these short term emotions (adrenaline they call it). I would love to see how traders were behaving during Black Monday (many turned mad). In addition, there are many "calendar effects" whose causes may be traced to investors' emotions and behavior (monday effect, january effect, sell in june and go away ... reflect patterns of behaviors)

Stock markets are a very complicated machine in my opinion, but some aspects of the EMH (efficient market hypotheses) still relatively hold especially in the long-run: fundamentals always prevail.  Prices are still a discounting process of future earnings, and reflect news in the long term (after overreactions or underreactions (due to emotions) are corrected).

Answer 13

In the short run, emotions play a big part (of course, investor emotions are influenced by many factors, including new reports, personal circumstances, the price of oil, etc.).

Over the long run, corporate earnings (as well as the expectation for future earnings) is the driving force behind stock prices. However, remember that future corporate earnings are also impacted by such things as oil prices, the political environment, tax policies, etc. If these factors are viewed as negatively impacting a company's future earnings, then that company's stock price will be negatively impacted.

Answer 14

No , stock market is based on industrial bussiness per day..., it is solely not related with emotions..