How Investor Behavior Influences Investment Performance

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How Investor Behavior Influences Investment Performance

 

I was once in a management position working for a very popular fortune 500 company. The company gave its management employees stock bonuses on a yearly basis based on their . At certain times throughout the year, the employees could login to the stock’s bank and view the amount of stock they held and decide to sell it. If they sold it, they were paid the amount of earnings from the sell within one week. Needless to say, it was like receiving a bonus.

I heard of one of the employees bragging to a member of upper management about how they sold their stock. Instead of receiving a “Wow, how much did you make?” response back, they were scolded. They were then told about how their selling affected the management member as a partner in the company withholding stock. On this note, here are the things they learned.

 

Good Thing about Holding Stock

When the management employee received the stock, they automatically became an investor. As an investor, it would have been good for them to keep their stock and not sell it. If the other investors (partners) held their stock too, the stock’s trading price would rise as more investors bought and held stock. This is how companies like Amazon and Google have reached such high trading price markings.

 

Bad Thing about Selling Stock

If the management employee went around continually boasting about selling their stock, this could be dangerous for the company. Why; because if other management employees began selling their stocks too, the stock’s trading price would drop. This would happen in the case of enough people selling their stock holdings in the company.

In the end, the upper management employees who had larger stock holdings would see the stock prices drop. Their fear of losing money may even lead them to sell as well and altogether, the company would decrease in its value.

 

In Summary

When investors continually buy and sell stock, the trading prices go up and down. If you are an investor and want to reduce the risk of other investor behaviors, please diversify your portfolio. Do not allow yourself to be at risk of another investor’s random idea by only having a few stocks in your portfolio.

 
By |March 29th, 2015|Categories: Investing|Tags: , |0 Comments

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