The psychological appraoch to stock market

        Stock market though best described as a scientific mechanism for price discovery, it not truely scientific. The movement in stock prices is more or less driven by speculation or mass psychology of traders.
        Somebody has defined stock market as "the reflection of mass pshycology of the world, their hopes, fears, etc". You may agree with this statement once you closely analyse the market movements over a period of time. To have more clarity we need to seggragate psychology in to rational psychology and emotional psychology.
        Rational psychology indicate the general perception of the mass. It is formed based on the direct and immediate analysis of the available news flows. But it is seen that this common man's belief or calculation comes true very raely in the real market situations. so we may say rational psychology affect only 10% in the market movement
      The rest 90% of price fluctuations are influenced by emotional psychology. Emotional psychology indicate the greedy and fearful reaction of the mass.These actions are unplanned and un controllable. This emotional psychology leads to high risk ventures by participants. this over-trading and extreme greed or panic may result in undeserving moves in prices of stock. and again this abnormal price moves attract further speculative actions on both buy side and sell side.

      Hence, as the emotional psychology dominate the price change, the volatility in the market wiill persist. similarly un-justifiable moves in stock market may continue. To become a successful trader you need to realise this psychological effect besides the fundemental and technical approaches. And one should learn to follow the trend and never buck the trend
       Patience and self descipline are the two inevitabile qualities of a successful trader. there is a saying that to be successful in market you need to have nine man's patience and one man's intelligence.
         To conclude you might have understood that one has to approach stock market very carefully and have to admit the volatility and temporary speculative moves before making any investment in shares. cursing the market for your loss is just a revealing of your failure and not a justice for your mistake. How ever there is no doubt that in the long run the stock market will exactly track the economic development of a country and other fundemental factors affecting the company. But in the short run prices fluctuations are more driven by speculation rather than the fundamentals.
By Invitation:
Abbas vattoli
Assistant Professor in Commerce
AMAL College, Nilambur