If there is a long term winning strategy for investing/ trading in the stock market, it means the market is efficient. Research on the stock price trend and its main influencing factors such as investor psychological behavior can not only help the investors to understand the running mechanism of the stock market but also provide supervision institutions with related advice about their policies. The behavior finance study is the newest research in the financial study. It breaks through the traditional finance study viewpoint and studies investors' behavior from the psychology angle. It is important to analyze the stock market from the behavior finance study angle and discuss the investors' behavior. Especially, the emerging theories such as behavior finance theory, which based on psychology and behavior theory, emphasis the influence of psycho on the investment decisions. This essay will firstly discuss the definiton of behavior finance. Following this, it will explain the long term winning strategy for investing/ trading in the stock market. Finally, it will look at how the behavior finance affect the long term winning strategy for investing/ trading in the stock market.
The definiton of behavior finance
Behavioral finance is a science studying the decision-making behavior of investors under uncertain circumstances by using new mode about human nature. In 2002, The Nobel Prize of Economics was awarded to Daniel Kahneman, an American Psychologist, which means the Behavior Finance has been accepted by the mainstream of economics. Behavior finance is based on the suspicion of the hypothesis about rational prospect, risk evasion and maximum utility in the modern classical financial theory. Behavior finance began to develop in China in 1980's resulting from the discrepancies between traditional finance theory and practical application. Behavior Finance has been a hot academic theme in recent years. Behavior finance with tradition finance is an opposition to unify. Get into 1980's, the behavior finance learns along with the micro corpus studies of value increasingly in the financial circles quick development strengthens. The behavior finance mimics the financial affairs practice to enterprise or the company having very important significance.
The long term winning strategy for investing/ trading in the stock market
A place where the exchange of stocks takes place is called a stock market. Also, the stock market is a very interesting and complex part of the business world. Stock market develops fast, holds more and more important status in the national economy. Due to the rise in interest rates, fewer people are investing in the stock market. With the development of the economy, demand for trading in shares of the stock market contributed to the formation and development. Investing in the stock market is not at all the safest way to make money. We ever think about investing in the stock market, but facing the complicated market, we are worried about being lost in it. Sometimes, there are thousands of stocks in the market and we are confused about them and want to know which the best one is. All of us want to enjoy the fun of investment venture, but don't want to take the risk of big loss. The stock market is a very interesting and complex part of the business world. However, investing in the stock market is not at all the safest way to make money. Many people are afraid to invest money in the stock market because it is a risk to invest in the stock market. Comparing with the fixed deposit, investing in the stock market is higher revenue but higher risk way to invest. The investment in the stock market is usually at market bottoms. As a result, all of us question the wisdom of investing in the stock market for the long term. Although Britain's richest are experiencing the sharpest surge in wealth, the rest of the population has also benefited from the stock market boomrising house prices. You should learn more about the stock market to have a better understanding of how the stock market works.
By now, behavioral finance has had a predominant impact on many financial services. However, long term investors in the stock market have received extremly little directions from behavioral financial economists.
Mathematically, if its expected profit varies over time, we can see the risk of an asset, which are different between the short-term risk and the long term risk. With constant expected profits, the annualized standard deviation over a long holding period (say N years) is the standard deviation over one year divided by the square root of N. Thus with constant expected profits, the standard deviations of all assets would shrink with the square root of the horizon, but they would shrink together; we could not see the standard deviation of stock returns shrinking more rapidly than the standard deviations of the profits of bonds and bills. Evidence for reduced relative risk of stocks at long horizons is therefore indirect evidence for predictable variation in stock returns.
In modern times, because the stock market has the prospect of high returns together with low long-term risk, lots of investors are drawn to it. Many investors are trying to invest in the stock market for a long term (Campbell, John Y. and Luis M. Viceira, 2001). If expected stock profits are unchangeable in the course of time, then similar to the high profits of the past, one can hope to earn high stock profits in the future; but in this case, investment in the stock market is a risk in the long term, just as they are in the short term. If instead stocks tend to revert to the mean, then they are relatively safe assets for long-term investors (Campbell, John Y. and Luis M. Viceira., 2002); but in this case future returns are likely to be meagre as mean-reversion unwinds the spectacular stock market runup of the past decade.
How the behavior finance affect the long term winning strategy for investing/ trading in the stock market
People realized in the capital market, many phenomena and processes cannot be explained by using existing methods and theories. For example, according to the natural methods, when prices fall, the risk is released and it is safe and valuable to buy things. People always hope the products on sale and then they can go to the supermarket to buy things at a cheaper price, but the stock market is on the opposite. As a result, we cannot use existing methods and theories to explain many phenomena and processes. In the past, before the emergence of behavioral finance, people thought the stock market and real estate market were the same things and investment in the stock market was similar to sell buildings. Behavioral finance admits that the stock market has many changes and the process is decided by people's psychology. Stock market changes in many cases not purely objective, and the change of it is related to the psychological characteristics and behaviors of the participants. To a large extent, the stock market is not scientific and logical. Having corrected the basic error in the theory of financial capital market in the past is the important value of behavioral finance. There are many phenomena in the stock market: The market is overvalued or undervalued, the formation and destruction mechanisms of bubbles, the slump and depression of the stock market. Traditional finance cannot explain those phenomena, while behavior finance can explain the market anomalies by using human behaviors such as greed and psychological factors very well. Generally speaking, mood can affect the justice of people. Good mood can make people tend to the active judge and bad mood make people recall some negative aspects, and lead to negative expectations. In daily life, people can make all sorts of cognition errors, and in the financial market it is also not exceptional. Regardless of the individual investors who invest the stock market or senior financial analysts, their decision are more or less influenced by subjective feelings such as their emotions, characters and psychological factors and so on. Investors are not always taking a rational attitude, and their investment decisions are not only influenced by the inherent cognitive biases, but also affected by external environment. Behavioral finance thinks that investors' emotions affect the decision of investors and ultimately affect the price of stocks. For investors, behavioral finance is important because it can deal with some confusion in our investment and avoid some mistakes of investment. Our investment decisions may be affected by emotional and psychological effects, behavioral finance can help us to understand the effects effectively. Behavioral finance is perhaps what we must grasp in our investment. Some financial practitioners have started to use the behavioral finance investment strategy to guide their investment activities.
The emergence of the theory of financial market micro-setup and behavior-finance has aroused extensive focus on the herd effect in securities market. Theory of chaos theory fractal market theory and especially behavior finance have broken through some phenomenon from different angle that EMH cannot explain.Behavior Finance has been a hot academic theme in recent years. The relevant research of behavior finance thinks security market investor is put in all sorts of cognitive deviation, which bring about the excessive reaction of pair of near future information thereby. People are in a challenging situation. Consequently, many people understandably tend to build up their savings in the bank. In the process of investing in the stock market, investors not only to analyze the flow of funds, but also to the mainstream understanding of the nature of the funds. Theories of behavior finance can be applied to explain such phenomena.The impotence of efficient market hypothesis in foreign exchange market is established.
These days, talking about the stock market is a reliable way to communicate well with each other in our daily conversation. But at times nearly everyone has lost faith in stocks and we should think about investment in the stock market carefully. Indeed, among the shares hardest hit the summer in 2008 were those that unscrupulous brokers had touted as sure-fire winners from the business: restaurants selling Peking duck, hotels, and so on.
However, it's not a time to get overly optimistic about anything. Most of us are in a challenging situation. Understandbly, compared with the risk of investing in the stock market, many people tend to keep their savings in the bank (Stucki, Barbara, 2006). If there is any guide in history, eventually, both the economy and the stock market will pull throw.
We can do as follows.
First of all, let's don't get greedy. Concentrate on blue-chip stocks, that is, companies which have a long and pretty successful pedigree and decent long-term prospects.
Second, the balance sheet must be paid attention to. Those more suited to pull throw are companies with better cash positions.
Third, we should look at dividends. If the stock market keeps moving sideways, companies fitting the previous criteria should be able to maintain that payout, which is helpful.
As is representative in difficult times such as the financial crisis, each of these ideas may give you a logical warning that could stay your hand. In the stock market, there is never a thing without question, which is certificate of deposit. And usually you will not be given too much in return over the long term.
The followings are four blue-chip names for you to consider: Avon Products, Microsoft, General Electric and Boeing. They are all famous companies.
Conclusion
In conclusion, firstly, the relatively large amount of money put into the stock market will lead to the frequent fluctuation of the stock price at a high level. Secondly, the relatively large amount of investors will also lead to the similar phenomena. Finally, passive investment attitudes have negative influence on the rising trend of the stock price. In a word, there is a long term winning strategy for investing/ trading in the stock market, and it means the market is efficient.
