Investors Often Cause Stock Market Problems
With the advent of online banking and online trading, the stock
market has opened its doors to virtually every person willing
enough to grow their money.
And yet, despite this, not everyone has joined the bandwagon.
The biggest factor being the potential risk involved in trading
stocks.
The stock market is among the most volatile financial
institutions in business. And it's this volatility that tends to
be the biggest problem with the stock market.
Almost any reason, real or imagined can cause these extreme
fluctuations that often affect the stock market's credibility.
Real factors such as the weather, political instability,
political decisions, war, terrorist threats, boycotts and
strikes, economic trends and international trade or even company
scandals also become factors to the stock market problems.
Bad weather such as hurricanes affects certain industries such
as oil production. This then drives the cost of petroleum
products higher as production gets limited. This causes a
cascading effect that drives stocks of oil companies higher.
Political instability in a country can affect investor
confidence thus lesser investing is done. This causes the shares
of local companies to slide downwards.
Boycotts, strikers and terrorist threats have also proven to be
the bane of the airline industry. Shares of airliners have
tumbled throughout the years with every terrorist attacks all
over the world.
But aside from uncontrollable factors such as natural disaster
(or war), the common underlying link that allows these other
reasons to affect the stock market so significantly is investor
psychology.
Humans are prone to herd mentality. Often, people confirm with
the actions and directions of other people.
This is a common mistake in investing.
An example of this is during the early 90s when dozens of dot
com companies sold their stocks in the stock market. It created
an artificial demand for stocks of companies that did not even
provide real and concrete services.
These stocks soared in value as more and more enthusiastic
investors bought them. This happened up until the time it was
realized that these companies did not actually post any
considerable profit to sustain the value of the shares.
The stocks then tumbled and virtually lost value as investors
frantically sold their shares.
This tendency to panic and depend on the direction of others is
among the real causes of problems with the stock market.
There are two actions arising from this mentality:
a.) panic buying b.) panic selling
Of the two, panic selling causes the most harm since it causes a
steep and quick drop in the value of shares.
The best way to avoid causing these problems is to practice due
diligence and to keep a level head while investing.