Investing for Beginners – Emotions and the Stock Market

One of the biggest tips when it comes to investing in the stock market is to avoid being emotional as emotions can negatively affect your returns. Although emotions are great in many situations that you might find yourself in every day, when it comes to the stock market, there is nothing more dangerous than being emotional. Imagine this, you have just invested your first $2,000 in a blue-chip stock – a stable stock that has a large market capitalization with an excellent reputation. You know that this decision is a smart one as the stock might not provide a high return but will provide a return that is in line with the stock market and is considered to be a safe investment option. It is a safer investment option as the company has been around for a long time and has built up an incredible reputation and it also might provide a strong quarterly dividend. Now your friend, who is less interested in personal finance and more into get rich quick schemes decides to buy a penny stock – stocks that are under $5 and are extremely volatile and risky – in the hopes of making a large fortune quickly. As chance would have it, the stock that your friend purchases skyrocket the next day and he doubles his money immediately and sells. He later tells you that it is silly to stick your money in a blue-chip stock that will gradually grow rather than increase quickly and that you should instead invest like him in penny stocks. He promises that you will make a ton of money quickly. Against your better judgement and the fear of missing out again on your friend’s potential gains, you sell your safe stock investment and put your money in the same penny stock as your friend. The penny stock drops 50% immediately and both you and your friend sell immediately. Your friend decides that the fear of losing money through investing is not worth it and decides to never invest again. Your friend ends up with the exact same amount of money he started with and you are left feeling silly, having lost half of your money because you let your emotions take control rather than your logic. 

This example shows a fundamental rule of investing: that the stock market is always in a state of increasing and decreasing daily and that you should keep your emotions in check and not give in to market pressure – pressure from people telling you to buy specific stocks or industries with the promise of making money quickly – or to invest in hot stocks that people say will never go down. One of the best ways to make sure you lose a lot of money quickly is to jump on any potential bandwagon for stocks that everyone is saying will just keep rising. This is exactly what happened with the dotcom bubble during the late 1990s when people kept buying into internet stocks because they were worried they would miss out on incredible gains which pushed the stock price higher and higher until the point where the stock price was not representative of the actual company and came crashing down. Once people started realizing that the stock was overvalued, the stock price dropped and the crash bankrupted many people.

The best way to invest $1 or $100,000 is to keep a level head and have an impulse control to steer clear of any market speculation. A good investor will avoid stocks or financial assets that are pure speculation and will stick with companies that have strong foundations and have the potential to change lives in the future. It is always important to never forget that a ticker symbol or a stock price is linked to an actual company with workers and products/services and the stock price will go up slowly overtime as the company reduces costs and/or increases profits and becomes better-known. Therefore, it is so important to stick to your strategy and to always think long-term. If you are consistently investing in stable and healthy companies, the gains will show up overtime regardless of what people say on the internet through market speculation. If you stick with strong companies that are providing goods and services that are essential, you will be able to gradually increase your profits over the long run and retire with a large enough nest egg to do what you want to do with all of your free time.

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