Stock Prices rise because of greed, crowd behaviour, building castles in the air,

 expecting to find someone else who will buy from you at a still higher price. Are human beings ‘naturally’ greedy? Is greed so much a part of human biology? 

Stanford University psychology professor Brian Knutson conducted an experiment. In the experiments by Knutson and colleagues, volunteers pretend to buy and sell stocks while the imaging machine called a functional MRI records the brain areas activated. The findings suggested a connection between pleasure and the action of making a profitable stock sale and even risk-taking behaviour in anticipation or hope of gain, such as gambling. 

On these findings Bloomberg business editor commented: “At a neurological level, our species’ desire for money may resemble our desire for sex.” Human beings pursue activities that give pleasure or lead us to anticipate pleasure and we avoid activities that give pain or fear of pain. Under capitalism people learn that money can buy almost anything. Making money can become associated with pleasure just as surely as a bell can make a dog salivate, once the dog has learned that the bell means dinner. For the big capitalists the desire for more and more wealth beyond the necessities of life made them capitalists in the first place.

Now what has this all got to do with Profiting from Stock Price Movements. You must have observed that stock prices rise or fall due to a variety of reasons. Company’s performance, news or information about a company, changes in the economy, changes in the laws that bring a change to a company’s performance, rumours and insider information. This brings a change in the thinking process of the human beings and gives them pleasure. They expect the stock prices to rise or fall and in turn they expect to make a profit out of this. This process begins with one or a few investors. Slowly it spreads to more number of people. When it spreads to more number of people they in turn begin to think they can also make profits out of this. This leads to the crowd behaviour or the popular herd mentality. The next stage is where people who do not have any idea about the stock markets start to invest and think of making profits. A stage is reached when people begin to build castles in the air. They expect the prices movement to follow the trend and continue. People have been watching the price movement for such a long time that they come to believe the trend can never reverse. Now when you start building castles in the air the process can crumble at any time when there is a slight hint of a fear of the change in the trend of the price movement. Once this happens it will now lead to the fall in prices. The crowd behaviour or herd mentality is the first indication or sign. When panic sets people do not think rationally. More and more people are gripped with fear and they want to get out of the muddle before they lose all their money.

This is a cycle. If we look at the history of stock price movements we can see that it has been happening again and again with the time for which they last being different.

Conclusion

What can you as a stock trader or investor conclude from this information? In the stock market there is 50/50 chances to make profit or loss. Both are in your hands. You can be a successful trader/investor and make consistent profits if you can correctly follow the price movement cycles. This is easy to say but difficult to practise. This calls for entering and exiting the market at the right time. What is the right time? If you can avoid being greedy then your job becomes slightly easier. You can follow the technical charts, which will give an idea about the cycles. This can help you in finding out the top and bottom of the cycles and the position of this cycle currently. With the help of this you can decide whether the present opportunity is to buy – go long, or sell – go short. Now comes the most difficult decision. That is when to exit. You are making profit but not sure whether to exit now. Let’s say you have entered into a long position (bought shares). You may think if you exit now the prices may go up and you will lose the opportunity for making more money. This is what is called as greed. If you have to preserve your capital and continue to do trading then you must get rid of this greed. You must have a limit, an expected rate of return, which should be a workable limit keeping in view the price movement cycle and the stage at which you are entering the trade in the current cycle.