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
The stock market is a place where the exchange of stocks takes place. 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 worry about geting loss in the complicated market. We always get confused about thousands of stocks in the market and have no idea which one is best. We want to enjoy the fun of investment venture, but don't want 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. Investing in the stock market is a risk. Comparing with the fixed deposit, investing in the stock market is higher revenue but higher risk way to invest. It is usually at market bottoms that everyone questions 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.
Behavioral finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from behavioral financial economists.
Mathematically, there can only be a difference between the short-term risk and the long term risk of an asset if its expected return varies over time. With constant expected returns, 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 returns, 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 bond and bill returns. Evidence for reduced relative risk of stocks at long horizons is therefore indirect evidence for predictable variation in stock returns.
Many investors today are attracted to the stock market by the prospect of high returns combined with low long-term risk. Such investors are trying to have their cake and eat it too. If expected stock returns are constant over time, then one can hope to earn high stock returns in the future similar to the high returns of the past; but in this case stocks are much riskier than bonds in the long term, just as they are in the short term. If instead stocks mean-revert, then they are relatively safe assets for long-term investors; 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
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. We find ourselves in a challenging situation, and many people are understandably more interested in building up their savings than in investing in the stock market. 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 it's time to think about stocks once again. 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, many people are more interested in building up their savings than in investing in the stock market. If there is any guide in history, both the economy and the stock market will eventually recover.
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, let's look for value. All the Sturm und Drang has beaten down the whole market, including some household names.
Fourth, let's look at dividends. Companies fitting the previous criteria should be able to maintain that payout, which helps if the stock market keeps moving sideways.
As is typical in difficult times, each of these ideas will have a logical caveat that could stay your hand. There is never a sure thing in the stock market. Sure things are certificates of deposit -- and they usually don't give you too much in return over the long term.
The followings are four blue-chip names for you to consider:
Avon Products is a beaten-down stock, and it is very famous. It has nearly $1 billion in cash, and its dividend yield, at 3.7%, looks solid. Its direct-sales model and mildly less-fancy brand position may give it added appeal in a tougher consumer-spending environment. What's more, with a growing number of people out of work, the potential for a new crop of direct-sales associates could help Avon muscle through the downturn. Avon is one of a small group of companies which have improving balance sheets and high credit ratings. As a result, investors should consider Avon. Also, there's always the risk that folks just won't want to buy as many beauty products in an era of thrift as they bought in the past. But Avon should have a strong enough balance sheet and brand position to pull throw.
Microsoft is another well-know company, which ever announced layoffs. It goes on to struggle with its Internet-related business initiatives. It is a strong company, which has more than $20 billion in cash, very little debt and a dividend yield of 2.6%. Under such circumstances, the occurrence of financial crisis impact on the capital market of Microsoft is not very great. In the past, it has made special dividend payments to investors. It may do so again once we are through these financial turmoil times. Even though Google and Apple get most of the technology buzz, Microsoft's software goes on to generate large amounts of cash. And with a modest price/earnings ratio of around 10, Microsoft trades at about the same as the Dow Jones Industrial Average P/E.
General Electric is stock which has become the epicenter of debates on the wisdom of buying beaten-down blue-chip stocks. GE is, at first blush, the epitome of a blue-chip name. It's one of the original Dow Jones Industrial Average components, and its brand covers everything from jet engines to power plants to media. And GE's valuation numbers look downright inviting. Its P/E is 6.5, it boasts an eye-popping dividend yield of 11%, and it has recently declared that dividend safe. Its share price, which fell to about $11 last week, is a far cry from the $38 a share reached less than one year ago. But GE, storied history and all, requires one small caveat and one large one. The small one is that GE faces, by its own admission, tough sledding in 2009. For the blue-chip bargain hunter, this really shouldn't be a problem. When things are bleak, you get your bargains. The larger caveat concerns GE Capital. The large finance business faces the same crisis that other financial companies face. Thus far, GE's nonfinance businesses have helped the company remain afloat. But what lurks in GE Capital acts as a major drag on the company's shares. So, while GE looks like a steal, there's a reason that investors aren't so sure.
Boeing is a famous company. Seems like a strange time to think about an airplane manufacturer, judging from the travails of the airline industry and the likelihood that people would rather drive to a park than fly to a resort in the coming months. But it is precisely because of that environment that Boeing is trading around $42, well off its 52-week high of $88. Along with the economic head winds, the 787 Dreamliner has faced production delays and the company has grappled with nasty union problems. Eventually, though, the Dreamliner will reach the market and the union issues will be managed. Moreover, Boeing operates in a global duopoly, sharing the large-airplane market with Airbus. The likelihood of a new, big-plane entrant is exceedingly small, meaning competition will remain contained. What's more, Boeing has a substantial aerospace business with the government, which is one entity that seems to be spending plenty of dough these days. With a modest P/E of about 11 and a dividend yield of 3.9%, Boeing has the earmarks of a good value. The key caveat: Its customers rely heavily on financing -- something that isn't functioning well at the moment. Until that market gets unlocked, Boeing could be in for choppy skies.
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.
