Friday, 9 November 2012

Understand market sentiments but don't follow them

The stock market does not run on money, it runs on sentiments. Sentiments are the prime motivating factor that drive the individual to execute transactions on the market, may it be cash, derivative, or forex. So how do investor sentiments play a role in driving the markets. Novice investors are purely emotional. Now when I say novice, it doesn't mean individuals who started investing or trading in the stock market only yesterday. But novice investors means people who have stayed in the market for 1 day or 10 years, but have failed to learn from their mistakes and continue doing the same again and again. So, this emotional sentiment is the thing that drives majority of the people in the market and that's what in turn drives the market. 

Why do I suggest not to follow market sentiments?
An individual can be emotional, but an institution is never emotional. An institution, may it be a brokerage house, FIIs, DIIs, or QIBs have enough potential to cause a rally or even a pull-back. But institutions just don't enter the markets at any point. They are looking for cheap bargains. This is why you get 'Sell' calls from all brokerage houses. Suppose you are watching this news channel saying "Stock Broker ABC is giving a sell recommendation on whatever stock", "Investment House DEF is giving an underweight rating to whatever market", "Someone is downgrading an entire country". Now as an investor who wants to make it big in the markets, you are brain-washed into believing that the market is definitely going to experience a pull-back. And it is true, it does experience a pull-back because majority of investors like you, who do not a firewall installed on their minds, have accepted the negativity these institutions are trying to spread in the market. These institutions manipulate investor sentiments. Yeah, that's right, they manipulate the market.

But my point was, yes, you will see a small pull-back when majority of individual investors give in to the hype created by these houses. But, why is the pull-back so small? Because, after majority of you have sold their stocks, these institutes get the bargain they were looking for and start accumulating at that level  causing the pull-back to convert into a rally.

If you really want to make it big in the market, stop watching and tracking news. Go against the sentiment.

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