The stock market runs on emotions is a common belief among investors. It is the investor’s emotions that drive the stock market up or down. The investment decision also depends on the emotional intelligence other than stock analysis. Emotional intelligence is the secret ingredient that makes a great investor. This article talks about what is emotional intelligence in the stock market and how it helps to make better investment decisions.
What is emotional intelligence?
Emotional intelligence can be described as the ability to recognize, understand and manage our emotions effectively during a stressful or challenging situation. It is also known as emotional quotient. It involves:
- Recognize, understand and manage ones emotion
- Recognize, understand and influence the emotions of others.
The stock goes through various ups and downs. There is high volatility in the market and this influences the investor’s emotions every moment. Amidst this high-pressure situation, it is very important to manage our emotions effectively and make a sensible decision.
Emotional decision making process
Our perception of a particular company, sector, or a particular index influences our investment decisions. Let us understand the emotional decision making by an example.
First, IQ comes into the pay. Our intellectual capacity to analyze problems differs from problem to problem. We did well in some subjects in college and struggled with others. Likewise, our ability to understand the current and future of various companies and industries will differ from situation to situation. That is why we tend to buy stocks which we understand well. We prefer to stick with ones where our IQ is the highest.
However, emotions do have an effect on the IQ level in all types of decision making. So, if you have high EQ with regards to one company, your IQ will also be high and vice versa. For example, if you are using a product or service of XYZ company, you had a great experience after using it. You will have a high EQ for the company and will be ready to invest in it.
Thus this was the emotional decision making process in the stock market.
How do emotions affect the stock market decisions?
We all know that the stock market changes every minute. There is so much happening at the same time. Investors are constantly under pressure to make profitable trades. They want to take advantage of every trading opportunity. So, one needs to take control of their emotions in the intraday trading pressure.
Emotions are a far more important driver of success than IQ. The emotions have a direct impact on our thinking capacity and decision making. If the investor’s prediction goes wrong it can lead to stress. The investor can become impatient and it affects their ability to think and analyze. It becomes difficult for the investor to think clearly and figure out a way to cover the loss.
That is why it becomes very important to have emotional intelligence and be mentally strong.
Why emotional intelligence is important in decision making
Emotional intelligence signals the ability to control one’s and other’s emotions and apply it in making important decisions. Now let us understand how emotional intelligence also helps in taking decisions in the stock market along with fundamental analysis of stocks.
- The emotional intelligence helps us to deal with anxiety and stress in an effective manner. It helps us to calm down and think in the right manner.
- It is the ability to manage our emotions and remove unwanted emotions. So, it doesn’t affect the important decisions.
- It makes you aware of the emotions which can lead to wrong decision making.
- The stock market is highly volatile and it always keeps you on your toe. It will help you to process abundant information at one time and not get stressed.
- The investors have the comfort of investing in stocks in which both their EQ and IQ are maximized. It helps in selectionof such stocks.
Emotional intelligence is the secret ingredient that makes investors successful and different from others. Learn more about top Indian stock market investors.
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