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Psychological Factors That Might Have An Effect On The Stock Market

By Guest

When it comes to economics, stock markets are important because they are one of the best ways for companies to raise capital. The prices of shares and other assets is an important marker of the economic dynamics of the country, and can both influence and indicate social mood. If the stock market is on the rise, the economy is considered to be an up-and-coming economy.

For example, rising share prices may be associated with increased business investment, and they also affect the wealth of households. Stock markets also collect and deliver the shares and guarantee payment to the seller. This means nobody gets jipped when they are trading shares and investing.

The stock market is an interesting subject to study because in theory, the market should function normally. That is, the probabilities and risks involved in the stock market should be known and largely independent of the investment decisions of the different players. Yet from experience we have found that investors can temporarily move financial prices away from their long term price “trends.” Over-reactions can happen. Over the top optimism may drive prices unreasonably high or mass panic may drive prices unusually low.

Psychological factors have been known to influence the market strongly and have been studied and analyzed. For one, people have a tendency to see patterns that may not exist in reality. An example of this would be seeing a shape in a cloud or in an ink blot. This means that receiving a bunch of good news about a company may lead investors to overreact positively, which may drive the price of the stock up for no real reason. Another psychological phenomenon that could affect the stock market is group thinking. As social animals we are always looking over our shoulders to see what the other guy is doing, and often times basing our decision on what he does for no explicable reason.

The stock market may be so fickle because securities and stocks can be increased or decreased down by any amount of fast market changing happenings. Emotions have a tendency to drive prices down and up, people are simply not rational creatures, and reasons for buying and selling are honestly obscure at best a lot of the times. Irrational investment decisions incorrectly price securities, which causes inefficiencies in the market, which are, in turn, huge opportunities to make, or lose, money.

Mallory Megan works for Rapid Recovery Solution and writes articles about medical collection agencies.

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Article Citation
MLA Style Citation:
Guest, Guest "Psychological Factors That Might Have An Effect On The Stock Market." Psychological Factors That Might Have An Effect On The Stock Market. 1 Jul. 2010. uberarticles.com. 19 Aug 2014 <http://uberarticles.com/finance/stocks-mutual-funds/psychological-factors-that-might-have-an-effect-on-the-stock-market/>.

APA Style Citation:
Guest, G (2010, July 1). Psychological Factors That Might Have An Effect On The Stock Market. Retrieved August 19, 2014, from http://uberarticles.com/finance/stocks-mutual-funds/psychological-factors-that-might-have-an-effect-on-the-stock-market/

Chicago Style Citation:
Guest, Guest "Psychological Factors That Might Have An Effect On The Stock Market" uberarticles.com. http://uberarticles.com/finance/stocks-mutual-funds/psychological-factors-that-might-have-an-effect-on-the-stock-market/


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