INVESTMENT ACCOUNTS » Investing Money

Investment psychology, in a nutshell, is the process by which an investor watches established levels of value in the market to make decisions for future investments. In other words, it is how investors think when considering whether to buy or sell stocks, or invest in any other way.

Investment psychology has been well-studied and there is an extensive amount of information available on the topic; however, to get a basic grasp of the concept, here are some of its main theories:

Contrarian Theory This theory takes a look at why it seems people buy or sell stocks in contrast to how consumers spend their money. Consumers seem to buy when prices are low, while a common investor behavior is to buy when prices are high. It also notes that some people playing the stock market simply follow the crowd to avoid making embarrassing mistakes alone.

Prospect Theory This theory suggests that people will respond differently to the exact same situation depending on whether it is presented to them as a loss or a gain. Inside this theory is 'loss aversion,' which means that people are willing to take more risks if they feel it will help them avoid losses, but won't do it as much to realize gains.

Regret Theory This looks at the emotional reaction people have after making an error in judgment. This applies to having bought a stock that has now gone down, not buying one that went up, or selling at inopportune times.

Anchoring This is an investor behavior inherent in those who assume current prices are the correct prices because they lack better information. In this phenomenon, people give a recent experience too much credit, when in actuality, it may not occur again anytime soon.

Market Over- or Under-Reaction This is the market-wide consequence of investors relying too heavily on what they find in the news. As a result of the good or bad news they've learned, they may become too optimistic or pessimistic and the prices in turn rise too high or fall too low, leading to extreme events like manias and crashes.

As many experts have discovered, playing the stock market not only involves the simple desire to buy or sell stocks; it also comes with it a whole world of investment psychology. But it's not a bad thing because learning more about why people invest the way they do can help to better understand the unpredictability of the market and what it will likely do next.

Brokerage houses, also known as brokerage firms or just brokers, are essentially companies that are authorized to sell and purchase securities and stocks. They are licensed and act as intermediaries between sellers and buyers of stocks and securities, and they meeting the demands of their clients with respect to investment strategies. The transactions of brokerage houses are carried on by people call brokers, who provide investment services and are employed by the brokerage house.

Examples of brokerage houses would be companies such as Merrill Lynch, Bear Stearns, Morgan Stanley, and Goldman Sachs. These brokerage firms act on commission on behalf of their clients. Different firms charge different fees for brokerage services, but they are usually dependent upon the concept of price per trade. For example, a higher charging firm might charge a higher commission for more personalized services or faster service, whereas a firm with lesser fees might turn out to be slower in the execution of its brokerage services when compared to a firm with higher commissions.

In order to become a stockbroker, a candidate must pass through an exam called the General Securities Representative Examination, which is also known as the "Series 7 exam." The general public cannot simply walk into the New York Stock Exchange and trade a stock. Therefore, brokers and brokerage houses play a crucial role in the selling and purchasing of stock for their clients.

The types of stock brokerage services provided by brokerage houses can be divided into three broad types:

Execution-only. This means that the broker only executes the investor's instructions to buy or sell.
Advisory dealing. In this case, the broker can advise the client to buy or sell, but the investor gets the final decision.
Discretionary dealing. The stockbroker acts on the investor's behalf with a general understanding of the client's investment objectives.

When choosing a broker, it's always important to thoroughly investigate the rates on commissions and make sure you find a trustworthy brokerage firm that can help you meet your investment goals.

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