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Market psychology

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Super Contributor
Here are some questions that I just cannot answer about traders/investors: 1) Who are the people that are buying a stock as it falls aggressively and why do they buy it because to me it seems obvious that buying a falling stock makes no sense? 2) Who are the people that are selling a stock as it moves aggresively up in price and why do they sell why not just hold? 3)Why do people not trade a stock during the day but wait for the closing auction and then offer to sell at a price that is ridiculously lower than the last trading price?
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6 REPLIES 6
Super Contributor
1. to put brakes on the falling 2. u don't know when the price will make a u-turn 3. good traders base their decision on closing price.
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Not applicable
Hey there Sponono, Investors look at a stock, determine a value for a stock (I take a 50% discount on what I believe a stock to be worth), then wait & when the stock is treated irrationally by the market, we buy in. Yes it seems as if we buy a falling knife, but there is no harm adding to a good position with even cheaper shares. Say WHL went from 21 - 9. I bought in from 17 - 10. ended with a nett cost of R10.89 - look at it now. I cant say for traders as I believe that they trade the price - up & down.
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Super Contributor
Bruberi is correct. We also buy businesses not shares. so our main goal is to put a price to the company, determine what we are willing to pay for it and when its below that price we buy, obviously to get to these conclusions one needs to know the business quite well and have a good understanding of its operations, that way we are quite confident that it will prove worthwhile and the margin of safety we allocated compensates for the risks we take. the larger the risk the more margin should be added.
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Henni
Contributor
There is this irrational behaviour by average Joe on any stockmarket as opposed to the institutional buyers. Average Joe sells immediately when he has a profit, to lock in the 10% odd gain, when in fact he should be holding even longer and inversely, when prices are falling he holds even longer (forbid we sell lower than we bought) the idea being not make such a big loss, thereby fulfilling his destiny and losing even more when he does sell at the bottom of the curve when the nerves gives in. We have all been there and the trick is to change this irrational behaviour of ours. Institutional buyers are removed from these feelings as each trade is not as critical - their spread is much better than average Joe could ever manage.
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Not applicable
Price action of any stock depends on 3 kinds of buyers - the value buyers when a stock has dropped, the momentum traders when the stock starts to recover, and the herd that buys on hype after a stock has surpassed fair valuation, causing a trend to run for way past good reason.
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Valued Contributor
not sure why it matters why others are buying or selling .. point is the market is made up of many different strategies, the oke buying at the low may be closing a short, or buying value, or desperate or what ever ..
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