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 opportunity being the potential risk involved in trading stocks.
The stock market is among the most volatile financial institutions in business. And it is 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:
- panic buying
- 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.
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Christer
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