Investor Psychology Essay

5219 words - 21 pages

SECTION - IINTRODUCTION.Investing is a method of saving that people follow in order to have a long term pecuniary independence. Man is a rational animal who has learnt the art of saving money with the primary objective of being financially secured in the long term.For the purpose of having a better understanding of the results of the survey that is presented in the following section, it is necessary to first introduce the Indian capital market as well as the economic scenario in India. In India, there are various options of investments a person can choose from, to invest his hard earned money.TYPES OF INVESTMENTS:Investments of individuals based on short term and long term can be mai ...view middle of the document...

Mutual Funds:These are a group of people, partnerships, or clubs that pool their money together to invest in a larger portfolio of stocks than they could afford to do on their own. These are managed by a paid Fund Manager. These are a great way to create a diversified investment portfolio with a lot less money, which typically results in a lot less risk of depreciation.Mutual funds have become one of the most attractive ways for the average person to invest their money. A mutual fund pools resources from thousands of investors and then diversifies its investment into many different holdings such as stocks, bonds, or government securities in order to provide high relative safety and returns. Mutual funds generally provide more return than the current interest obtainable through banks which are still one of the safest ways to grow your money. Things to be investigated before we invest in a mutual fund are their longevity of existence , average annual rate of return, the tenure of the fund managers, our investment objectives, type of companies the fund are invested in, and costs the fund charges.The study of these helps us identify Human attitudes and behavior which can be classified into three categories. They are:-Conservatism-Moderatism-Aggressive nature of Individuals.Equity:The stock market is another high risk high returns investment options available to investors. It is a set of institutions that facilitate the exchange of stocks between buyers and sellers.The returns on particular stocks may vary. Moreover, stock offer a very flexible time frame of investment, where it is possible to literally sell the stock one minute after you have bought it (called day trading) or retaining the stock for a long period. Apart from the change in the value of the stock itself, companies also pay dividends to the shareholder on an annual basis. The fluctuations in the price of stocks can also cause a person to lose heavily in a bear run, if the values of his stocks fall steeply. Generally, this option is generally exercised by persons who don't mind taking a risk and have some information about the stock market.SECTION -IIINTRODUCTION TO BEHAVIORAL FINANCE:People invest to make money. Though their motivations may differ (e.g., a bigger house, a better education for their children or a better retirement for themselves), their objectives do not. All the contemporary theories are based on one assumption - that investors always act in a manner that maximizes their returns. Yet volumes of research show that investors aren't always so rational. Psychological studies have repeatedly demonstrated that the pain of losing money from investments is nearly three times greater than the joy of earning money. Clearly, not every choice investors make is in their best interests. While emotions such as fear and greed often play a pivotal role in poor decisions, there are other causes of irrational behavior.Behavioral Finance is the study of how these emotions and mental err...

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