How Emotion Works on the Stock Market

Emotion is ever present in the stock market. Feelings do not discriminate among amateur and professional investors despite the fact that some people have more practice than others at keeping their emotions in check when making financial decisions. Nonetheless, positive and negative feelings do creep into the stock market and have an effect on stock market performance. These emotional extremes can trigger irrational decision-making that costs investors money, while in some cases joy can actually work to a stock's advantage.

Fear

There is an emotional pain that is associated with financial loss that can cause investors to continue holding losing stocks out of fear. Emotional investing is not limited to the small investor, either. Indeed, investment professionals, such as traders, struggle with emotion -- including fear -- when navigating the stock market, too. Professional traders are often cognizant of their weaknesses, however, and have strategic measures in place to help them control their fear of financial loss.

Bad Decisions

The stock market, by nature, is volatile. This means that stocks can exhibit extreme price swings that can make investors uneasy. Market volatility is blamed for causing investors to make ill-timed, emotional investment decisions instead of using logic, often leading to disappointing results. In the two-decade period beginning in 1992, for instance, emotional investing led investors to earn an average annualized profit of 2 percent, while the broader stock market advanced nearly 8 percent, according to BlackRock.com.

Euphoria

Emotional investing can occur in an individual stock just as well as it can permeate the entire stock market. Euphoria is said to be the emotion that drove the price of technology stock Apple higher by about 75 percent over the course of several months, according to CNBC. Eventually, investors started paying more attention to the company's financial fundamentals than their feelings, which had been driving the price increase, and Apple's stock began a sharp descent of about 10 percent.

Emotional Attachment

Emotional attachment, technically known as an "anchoring bias," can cause investors to continue owning shares of doomed stocks. These feelings of attachment can develop for various reasons, such as placing too much emphasis on a single catalyst that led to the investment decision in the first place. Emotional attachments can also form based on an expectation for a stock to reattain a particular threshold, a steadfast belief that may never materialize. As a result, emotional attachments can cause investors to hold into stocks until they are worth nothing.

About the Author

Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.

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