RESEARCH PAPER : FINANCE

BBA.LLB(Hons.) Second Semister

Topic:Investor psychology and market speculation in the stock market.

Submitted to:
Prof. Naveen Rohtagi
School of Law NMIMS
(Deemed to be University)

Submitted by:
Devanshi Gorakh
SAP ID- 81022100038
Roll no: 027
 INDEX

SR NO. PARTICULARS PAGE NO

1 Abstract 3

2 Introduction 3-4

3 Review Of Literature 4-5

4 Objectives 5

5 Significance 5-6

6 Limitations 6

7 Findings 6-11

8 Conclusion 12

9 References 12
Abstract:

Purpose : Stock Market is a very intricate system where transactions take place between
individuals that either pave the way for a downfall or for an upgrade in the individuals lives.
Investor psychology is an essential factor in the varying price levels of the stock market and it is
extremely important to shed light on the psychology of the investors who invest in this market.
Hence the purpose of this paper is to identify the importance of investor psychology and its
effects on the stock market as a whole. This paper also sheds light on the market speculation that
goes on prior to investing in this market.

Research Implications : This report presents a preliminary understanding of the investors

psychology and market speculation in the stock market. It also explains the effects of market
speculation as well as investor psychology in this markets overall price level. Further research
can be done to verify the findings of this paper.

Originality and value : This paper provides an understanding of how the stock market gets
affected by market speculation and investor psychology. This paper goes on to list the
repercussions of market speculation as well as investor psychology on the stock market and
whether it is a boon or a bane.

Keywords : Stock market, Investors, Investor psychology, Market Speculation, etc

Introduction:

Considering market movements are sometimes chaotic and irrational, self-awareness can assist
us in recognising when our instincts are not based on sound reasoning. Nothing is more
unpleasant than making a loss despite having the necessary research at hand, simply because of
our natural predisposition to behave and believe in specific ways. Investors' cognitive biases are
an important subject that stock-market psychology investigates extensively. A bias is an
erroneous style of thinking that we've got to recognize. Losses provoke a stronger reaction from
investors than gains do. As a result, the thrill of generating a Rs 8,000 profit pales in comparison
to the agony of a Rs 4,000 loss. If the market falls, this is what causes investors to panic and sell
their investments.
When it comes to playing the stock market, there seem to be two main ways to do it. One has the
option of investing in stocks or engaging in speculative trading. The rationale behind these two
conceptions is vastly different. Speculation, or speculative trading, is the far more popular of the
two, accounting for the vast majority of daily trade activity on Indian and global stock
exchanges. Market speculation is insanely risky, and the risks of losing a major portion of your
investment capital if the trade does not go as planned are very high. On the other hand, you have
a good chance of making a lot of money. In other words, such trading activity is a high-risk,
high-reward proposition.

Review of literature:

Dhaoui, A., Bourouis, S., & Boyacioglu, M. A. (2013). The Impact of Investor Psychology on
Stock Markets: Evidence from France., provides statistical data and is an empirical study based
on how human psychology affects investor behavior in the market. It also sheds light on the the
pessimism that controls investor behavior in the market and uses data from France to explain its
stands. It provides data and evidence from France stating how investing highly depends on
investor psychology in the market. It reviews evidence of how human psychology not only
affects investor behavior in the market but also the trading volume of the market.

Rystrom, D. S., & Benson, E. D. (1989). Investor psychology and the day-of-the-week effect.,
offers an insight to investors who rely on human psychology and day of the week to make better
investments in the market. It sheds light on the day of the week effect that is completely based on
the investors beliefs and that it can be a very simple concept or a completely complex concept
for investors before investing in the market. It also provides various evidence stating how the day
of the week affects investor psychology and then further their investments in the market.

Naseem, S., Mohsin, M., Hui, W., Liyan, G., & Penglai, K. (2021). The investor psychology and
stock market behavior during the initial era of COVID-19: a study of China, Japan, and the
United States, highlights the effects of the pandemic on the investor psychology towards the
market. It addresses the changes in the psychology of the investors due to the pandemic. This
paper sheds light on the behavior of the stock market during the pandemic. It mentions that
individuals and investors were filled with pessimism during the pandemic and so investors were
more concerned about their lives rather than wealth and leisure and and a result negative investor
behavior led to a downfall of the market during the pandemic.

Objectives of the study:

1. To define investor psychology and market speculation in the stock market.
2. To study how they affect the stock market as a whole.
3. To provide a brief on how it affected the investor psychology in the Covid pandemic.

Significance of the study:

This study is significant because it studies the investor psychology in the stock market and also
sheds light on what market speculation is and how it affects the market.
This research sheds light on how the investor psychology and market speculation was affected
during the Covid pandemic as well.
It analyzes the shock on the individuals during the pandemic that led to change in investor
psychology which further led to change in investor behavior and an overall change in the market.
This study is important for students, researchers and every individual to understand what exactly
is investor psychology and market speculation and how it plays a vital role in the ambit of stock
market.

Limitations to the study:

This research is based on secondary data collected from various newspapers, blogs, research
papers, articles, books, etc.
There were very few papers for the same but most of the information was found to be in large
books and articles.
This could be considered as a limitation to this research paper since other resources weren’t
approachable and easily accessible in nature.
Findings:

1. Define Investor psychology and market speculation in the stock market.

The study of the mind and behaviour as it applies to how we invest is a fascinating topic that
may also be incredibly valuable to investors. Because market movements are sometimes chaotic
and irrational, self-awareness can assist us in recognising when our instincts are not based on
sound reasoning. Nothing is more unpleasant than losing money despite having the necessary
research at hand, simply because of our natural predisposition to act and think in specific ways.
Investors' thinking biases are an important topic that stock-market psychology investigates
extensively. Investors focus on facts and information that is readily available to them while
researching a firm. The availability bias can be shown in this scenario. Investors base their
investment thesis on information they don't even have to seek for, rather than searching for
significant but less readily available data. Furthermore, if individuals already have a position,
they fixate on data that supports it, dismissing any data that contradicts it. These two prejudices
lead to insufficient investigation, which frequently comes back to bite them later.
The stock market then sees herd behaviour play out in a large way, resulting in overpriced sectors
or stocks. Initial public offerings (IPOs) are the latest market craze. Many IPOs have achieved
good listing gains in today's growing market. This has attracted an increasing number of "IPO
investors." As a result of the enthusiasm, an increasing number of businesses are flocking to the
list. The issue is that herd behaviour frequently results in market stampedes,' which leave
investors bruised and injured.
The world and its players, according to mainstream financial theory, are mostly rational "wealth
maximizers." However, emotion and psychology play a large role in our choices, leading us to
behave in surprising or irrational ways. Behavioral finance is a relatively young field that
attempts to explain why people make illogical financial decisions by combining behavioural and
cognitive psychological theories with traditional economics and finance.

In the stock exchange, speculation is the expectation of potential price movement based on the
idea that the market has priced the stock incorrectly. While all stock trading involves some kind
of speculation, speculative trades have a particularly large influence on financial markets. The
stock market and all of its movements are solely dependent on the millions of daily transactions
between buyers and sellers. Each of buyers and sellers has distinct motivations for their actions,
but they are all based on conjecture to some extent. In the stock market, speculation is the
expectation of potential price movement based on the idea that the market has priced the stock
incorrectly. While all stock trading involves some kind of speculation, speculative trades have a
particularly large influence on financial markets. Speculative trades are those that involve
companies with a high risk/high reward profile for any reason. This means that the investment
has a high level of risk, possibly to the point where one could lose a substantial amount of
money, but if the transaction goes well, it could grow quickly and make one a great deal of
money in a short period of time.

2. To Study how investor psychology and market speculation affect the stock market:

Speculation is a high-risk investment strategy aimed at profiting quickly from market price
changes. While speculating can be profitable in some cases, it is more likely to result in losses
when volatility is high. Speculators frequently trade assets such as stocks or cryptocurrency to
try to time the market. They want to buy at the bottom of the market and sell at the top. However,
it's far more difficult than it appears.

In relatively brief, speculation is quite dangerous. Speculators are looking for rapid returns,
usually by forecasting market movements. It has the potential to work out well in theory. If you
forecast an asset's price will climb and it does, you can make a lot more money than if you buy it
and hold it for a long time. Long-term investors, on the other hand, are much better positioned to
ride out periods of excessive volatility than speculators, who face enormous pressure on their
portfolios in this type of market environment. Speculation is a strategy that has the potential for a
large return but also has a high risk of losing money.

The most important reason to avoid stock trading speculation is because it frequently harms
rather than benefits a stock. In volatile markets, speculation frequently leads to fear. Losing
investors begin to sell their positions, causing their equities to fall even lower, causing even more
selling, and so on. Investors should also be wary of fast money, which refers to investors who
trade stocks frequently in the hopes of obtaining unrealistically high profits.
Rather than speculating, investors should search for other ways to increase returns on
investments in firms with long-term growth potential. This could imply investing in companies
with strong competitive advantages and a dominant market position, or it could mean investing
in industries that are rapidly growing. Investors should seek out organisations with strong
management. To the degree possible, one should concentrate on investing in high-quality stocks.
That involves looking for organisations with the strongest long-term potential, not just those that
are making headlines on any given day.

Investors are individuals, not robots, and emotions like fear and enthusiasm can sway them. But
in the realm of investment, that can be a major issue. When an investing portfolio is performing
well, there is an unbelievable sense of exhilaration. Higher-than-average performance might
make investors feel unstoppable. These highs would not be conceivable without the emotional
lows that the market may produce.

Essentially, psychological considerations in investing can have a significant impact on personal

and societal financial market outcomes. While both emotionally driven investment decisions and
the collective impact of market swings can reduce returns, there are strategies for investors to
make sensible investment decisions that might possibly increase their portfolios in any stock
market condition.

Fearing missing out on a profit, investors will chase equities that look to be performing well.
This leads to speculation without respect for the investing strategy at hand. Another common
sensation among investors is the fear of losing everything (FOLE). Although investors would not
like to be left behind, the fear of losing their entire investment is a more potent emotion. People
can feel agitated when market volatility creates enormous swings in the stock market, leading
them to sell their investments to avoid a large sell-off or stock market crash. This was especially
noticeable in the aftermath of the 2008 financial crisis. As a result of the market sell-off,
investors pulled their money out of the stock market, only to miss out on recouping losses during
the ensuing rapid comeback.
instantly, credits to a large part of the internet, the 24-hour news cycle exacerbates irrational,
emotionally based investment decisions. Investor reactions to global events are reflected in real
time since major global stock markets overlap during market hours. When that reaction is
exceptionally unfavourable, it can set off a chain reaction of sell-offs throughout regional stock
markets, creating what appears to be an endless loop of market adjustments and news updates.
The exaggerated movements of a volatile market can shake new investors' confidence, making
them dread losing the money they've worked so hard to earn.

3. To understand investor psychology in brief during Covid.

The COVID-19 outbreak has posed a threat to public health in every aspect of life. The global
stock market and financial markets' long-term viability also has significant implications. Market
timers take advantage of this mood condition by issuing season shares. During a period of high
sentiment, stock price sensitivity to excellent earnings news is higher. The stock price sensitivity,
on the other hand, behaves negatively during a period of low sentiment. According to the
analysis, investor sentiment becomes the cause of general stock mispricing due to sentient-driven
mispricing of earnings contributions. Investors are more sensitive to more intensely accept
psychological pressure than the average person. Aside from the pandemic's rapid spread,
financial news, media, and amplifiers have played a role in spreading COVID-19 fear. The
spread of stock market news has a significant impact on investor psychology and sociology.
Pessimism in the media causes downward pressure on market prices, and vice versa. With
disproportionately tiny equities, the investor sentiment hypothesis also demonstrated the
consistent association between media content and individual investor behaviour.
Conclusion:

As a result of the empirical study, it was found that the stock market was highly indirectly
controlled by investor psychology as well as market speculations. Investors are humans at the
end of the day and tend to get psychologically affected and influenced by what goes on around
and that highly influences their investment choices. This research also sheds light on the market
speculation that goes on and mentions it as a boon or bane in the stock market. The stock market
is known as a gambling den but the investors that step in should have a king mindset and not be
easily affected by any situation and should not rely on speculations in order to be at the top of
their game.

References :

1. Kahneman, D., & Riepe, M. W. (1998). Aspects of investor psychology. Journal of

portfolio management, 24(4), 52-+.
2. Naseem, S., Mohsin, M., Hui, W., Liyan, G., & Penglai, K. (2021). The investor
psychology and stock market behavior during the initial era of COVID-19: a study of
China, Japan, and the United States. Frontiers in Psychology, 12, 16.
3. Rystrom, D. S., & Benson, E. D. (1989). Investor psychology and the day-of-the-week
effect. Financial Analysts Journal, 45(5), 75-78.
4. Dhaoui, A., Bourouis, S., & Boyacioglu, M. A. (2013). The Impact of Investor
Psychology on Stock Markets: Evidence from France. Journal of Academic Research in
Economics, 5(1).
5. Hirshleifer, D. (2001). Investor psychology and asset pricing. The journal of Finance,
56(4), 1533-1597.
6. Sornette, D. (2000). Stock market speculation: Spontaneous symmetry breaking of
economic valuation. Physica A: Statistical Mechanics and its Applications, 284(1-4),
355-375.
7. Bernhardt, D., & Taub, B. (2008). Cross‐asset speculation in stock markets. The Journal
of Finance, 63(5), 2385-2427.
8. Chandra, A., & Kumar, R. (2012). Factors influencing Indian individual investor
behaviour: survey evidence.
9. Pahlevi, R. W., & Oktaviani, I. I. (2018). Determinants of individual investor behaviour
in stock investment decisions. Financial Review, 1, 2.
10. Wagner, A. F. (2020). What the stock market tells us about the post-COVID-19 world.
Nature Human Behaviour, 4(5), 440-440.
11. Güler, D. (2021). The Impact of investor sentiment on bitcoin returns and conditional
volatilities during the era of Covid-19. Journal of Behavioral Finance, 1-14.