The Influence of Psychological factors-
Decision making practices in Capital Markets:
Renowned Investor's great sayings.....“Individuals who cann’t master their emotions are ill-suited to profit from the investment process. Never forget to account for the psychology of the investor”- Benjamin Graham, the Father of fundamental “Value Investing” in Stock markets.
The stock investing in India in recent times is increasing many folds in leaps and bounds through organised Exchanges like BSE (Bombay Stock Exchange) and NSE (National stock Exchange). The stock-investors, be it an individual person or a group/institution who would allocate surplus money from their savings with an anticipation of a better financial returns from their investments to meet the future needs/aspirations. The awareness of stock investment is increasing with the growing economy and more companies are raising capital through markets. There are various investment options and different investment schemes are made available other than the traditional bank deposits, like Equity Investments, Debt securities, Gold, Commodities, Currency..etc through recognized Stock Exchanges.
There are more than 5000 companies listed and are regularly trading in both the exchanges. The Indian corporate market capitalisation has increased many fold to cross 1 trillion USD and at times, the trading volumes in the bourses are breaking the world records. So far, the Indian capital markets are offering safe and higher returns from blue chip companies that offer regular higher dividend along with price appreciation attracting the Foreign Institutional Investors. The FIIs dollar driven liquidity accelerating the growth of Indian Market Capitalisation, made investments of Rs 6,370 crores in 2000 has increased to an all time high of Rs 1.405 Lakh crores in 2012, even the average is working out Rs1.0 Lakh cr for last 3 yrs. Apart from the FIIs, the universe of Investors base is increasing day by day and day after day, those can be of individual retail investors, Mutual Funds, Hedge Funds, Venture Capitals, Insurance companies like LIC of India & other private insurance companies and Investment trusts like EPF (Employee Provident Funds).
The Advantage INDIA:
The Indian economy has taken the advantage of attracting the Foreign Direct Investment in India is benefiting the Indian companies at large. The huge geographical spread and rich natural resources attracting multi-billion dollars of investment in mining, oil& gas exploration, highways, ports, pharma and in manufacturing sector etc. The high skilled employees of Software industry and exports from India are bringing dollars to national wealth reserves, are culminating the growth of economy and the Stock markets as well.
The positive side of growth expansion has also opened with new Govt in office. The recent run-up in Indian stock markets opened even more challenges to Retail Investors in choosing the companies for investment, timing the investment and the lack of expertise in en-cashing such Investments are jeopardizing the whole investor fraternity.
There are many opportunities associated with stock market investing. It can make or break the life of an investor in no time. Most stock Investor blindly believes publicly available suggestions and keep emphasis with over-confidence about the quality advice/credibility of such information received while investing, has been universally accepted and repeated investment mistakes termed as psychological biases. So, individual human psychology determines success or failures in Stock Investing.
Psychological Issues of Investment models:
The psychological aspects influences to make the difference from the rest, as everybody in the stock market is smart with their investment plans & brilliance offsets each other. To become successful in the stock-market, merely sound knowledge about the market does not suffice. It requires various right decisions that bring the investors to emerge out as successful winners.
The psychological presumption of following the trend is nothing but herd mentality when right time exit does’t take place!. The retail investors participation in purchasing the stocks from the secondary market will be tepid at the bottom where the Indices show little interest to go up, so is the stock uptick. On the other hand, when the markets rise and are close to their yearly highs, the traders and short-term Investors exuberance is high with high level of participation at the tops for quick bucks!
It is often observed that the bubble formation takes place when the retail investor fund inflow increases phenomenal as the money chases the stocks relentlessly without considering the fundamental values of the company and its performance. The volatility levels will be high and the returns are immediate, also huge at the short-term is more often seen as “God sent Opportunity” and shear speculation to make quick bucks as “Want of owning the Stock” for short-term gains leads to disastrous burst.
The “Greed and Fear” of the investor’s psyche that drive the market’s nerve-wrecking volatility that constitutes a deep struggle between the two fundamental emotional forces of BULLs and BEARs. The market’s peaks and bottoms are the mirror images of the irrational emotional swings of investors who are too OPTIMISTIC or PESSIMISTIC of the stock prices and their future performance.
Psychological influences on Investors:
The Indian investors are considered to be with strong value system being maintained with morals and ethics. However, he /she may not be avoided with some influences that come from both internal and external directions. The Fly by Night Operators take the advantage of Bullish periods of stock markets to sell a bunch of multi colored dreams of stocks future valuations by showing irrelevant projections and prospects of thinly traded stocks, mint money by selling those to retail investors.
The most common investing “Psychological Pothole Traps” coupled with external recommendations, group behaviors, irrational relative comparisons with blind confirmations and internal individual views consists of anchoring presumptions, delay due to doubts & suspicion, over enthusiasm & wrong aspirations, lack of confidence, lack of risk taking behavior & knowledge converting to dependency, along with inordinate reliance on existing trend, procrastinating & denial with adamantine nature for a change when needed and horrifying, compelling panic-ness to SELL during fall leading to serious capital erosion, instead of what was thought!. These abnormal behaviors, irrational investment decisions generate huge losses there by lowering Self-confidence and respect in markets which ultimately affecting on decision making abilities of the investors.
Investment cross-check:
The Investor fraternity has to examine the influence external forces on decisions making practices in capital markets, be it the peer group or media, or personalized solicitations via mails/SMS about investment tips. Investors shall focus on the individual cash flows, knowledge about markets& risk taking behaviour, needs & aspirations and most importantly the emotional balance to sudden SHOCKS, also the availability of supportive family environment & mentor group behaviour, if any. So, special emphasis would on stable composure to identify quality stocks and the price relevance apart from analysing other economic and political factors, while considering stock investments!!!....
