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5 Psychological Traps That Investors Should Avoid
Publish Date: June 11, 2019
By: Sandhya Kannan, Head – Content
The Indian stock market can be an exciting place. Stock prices dip and rise through the day, leading investors to modify their share market plans accordingly. But even the best investors are occasionally led by their emotions and biases, which lure them into psychological traps. As a result, they end up making bad decisions.
How can you safeguard your investment plan from these traps? Avoid these five psychological pitfalls:
1. Anchoring bias
Investors sometimes get too attached to past data when trading. Ever picked up low-priced stock hoping to make big gains? Perhaps you anchored your expectations in the stock’s excellent track record.
What’s a better way to approach this? Question why the stock price dropped. The reasons may indicate whether this is a good trade or a bad one.
Related: Why do stock prices fluctuate?
2. Superiority trap
A little confidence is a good thing. But too much of it can backfire.
Sometimes, investors believe they know more than the experts. But the markets are complex. By not heeding expert advice, they could make the wrong trades and sustain big losses.
3. Confirmation bias
Say, an investor is keen to purchase a certain stock. He looks for information to confirm his reasoning. But he ignores anything that goes against his opinions.
Thus, he does not get a comprehensive view and could end up making a bad trading decision.
Related: How to calculate earnings from the market
4. Loss aversion
Say, you’ve invested in a loss-making stock. The general advice is to sell before the stock tanks further. But there is your sunk cost to consider. How do you pull out before making any gains?
Remember, not all trades bring big profits. It is best to accept your losses and move on.
5. Relativity trap
A friend might be making a small fortune through high-risk investments. But should you take the same route? She might simply have a higher risk tolerance than you do.
Instead, assess your own needs before starting to trade. Pick securities that you can handle both psychologically and financially.
Related: How to deal with a market crash
Conclusion
Everyone falls into psychological traps from time to time. How do you avoid them? Keep tabs on the latest information and seek advice from industry experts. Unbiased, informed decisions hold the key to share market success.
Begin your stock market journey with a trading account. Click here for details.
Also read:
- Investment strategies of the world’s top investors
- 6 key words to look out for in annual reports
- Learn about the Stock Lending & Borrowing Mechanism
- Keep an eye on the most active stocks
- Inculcate the discipline of investing
