The Link between Market Psychology and Dividends

Market psychology plays a vital role in the smooth running Forex Broker List of the economy and the stock market. Meanwhile, dividends are very much popular among investors who want to earn consistent income. Learn more about the relationship of these two.

Market Psychology

The stock market is the collective result of the decisions of millions of investors. Even though stock prices are based on the value of the issuing company, fluctuations in the stock market are mainly dictated by human psychology.

If an investor thinks the future is bright for a given company, he or she would want to invest as soon as possible to reap the maximum profit. If enough investors feel the same way, the increase in investment drives the stock price up, thereby fulfilling the investor’s prediction.

Conversely, shareholders who believe that a stock is about to take a dive sell quickly to avoid losses.

If enough shareholders buy or sell around the same time, other investors start to think that they’ve missed out on some crucial piece of information. Especially among individual retail investors, the baseline assumption is generally that others know more than you do, so it attracts you to follow the herd.

This kind of mentality usually results in previously neutral investors TradersHome Review suddenly entering the fray to prevent from missing out on profits on incurring losses, further worsening the effect.

Basically, when the collective opinion of investors is positive, the stock prices go up. When the general consensus is less than optimistic, the prices slide. In spite of the apparently complex nature of the market, most activity boils down to the cumulative effect of investors trying to predict what their peers are thinking.

Essentially, it’s all one big guessing game with financial repercussions that are anything but trivial.

How Dividends Work

For investors, dividends serve as a good source of investment income. For the issuing company, they are a way to redistribute the profits to shareholders as a way to thank them for their support and to encourage additional investment.

Dividends also serve as an announcement of the company’s success. Since dividends are issued from a company’s retained earnings, only companies that are substantially profitable issue dividends with any level of consistency.

The Effect of Dividend Psychology

Stocks that pay regular dividends are more popular among the investing populace. Even though dividends are not a given among common stocks, many companies pride themselves on generous rewarding of shareholders with consistent and sometimes higher dividends each year.

Companies that do these are seen as financially stable, and financially stable companies make for good investments, particular for those buy-and-hold investors who are most possible to benefit from dividend payments.

When companies display consistent dividend histories, they become more appealing to investors. As more investors buy in to take advantage of this benefit of stock ownership, the stock price naturally goes up, thereby reinforcing the belief that the stock is strong. If a company declares a higher-than-normal dividend, public sentiment tends to rocket up.

Conversely, when a company that traditionally pays dividends issues a lower-than-normal dividend, or no dividend at all, it may be considered as a sign that the company has fallen on hard times.

The truth could be that  the company’s profits are being used for other reasons, such as an expansion, but the market’s perception of the situation is almost always more powerful than the truth. Many companies work hard to pay consistent dividends to avoid freaking out investors, who may see a skipped dividend as a slightly foreboding event.