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FINANCIAL MARKET PSYCHOLOGY: AN INVESTIGATION INTO SENTIMENTS FACTOR IN STOCK TRADING IN NIGERIA

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ABSTRACT
Market psychology is the overall sentiment or feeling that a market group experiences at any particular time. Greed, fear, expectations and circumstances are all factors that contribute to a market group’s overall investing mentality or sentiment.
While conventional financial theory describe situations in which all the players in the market behave rationally, not accounting for the emotional aspect of the market can sometimes lead to unexpected outcomes that cannot be predicted by simply looking at the
fundamentals.
Technical analysts use trends, patterns and other indicators to assess the market’s current psychological state in order to predict whether the market is heading in an upward or
downward direction.
The postulation therefore, and which is duly supported by the findings of this work, is that beyond the fundamental and technical analysis, market psychology or investors’ sentiment is the missing link that must be connected to guide successful and profitable stock trading strategy.
In line with the above postulation, a survey of individual investors and Asset Managers was carried out to ascertain the psychological or sentimental inclination of the average
Nigerian investor. The questionnaire was the major survey method. Simple percentage analysis was used to analyse the data. This method was found sufficient in view of the nature of the research. A Fundamental and Technical Analysis of select stocks in select sectors were carried out, but they served to merely demonstrate the method of such analysis. Little or no reliance was made on the results so generated from these two methods of analysis in reaching our conclusions.
The key find of this research work is that stock investment in Nigeria is largely driven by sentiments or the bandwagon effect; they are not supported by any fundamentally or technically verifiable strategy.

CHAPTER 1
INTRODUCTION
1.0 General Background
The conceptual framework for this work sees the stock market not as a mathematical abstraction but as engines of discovery that reflect sentiments and emotions. These elements are captured in the economic, political and social forces that shape and are shaped by the society.
Financial markets are said to be rational but not perfect discounters of events, information
and trends.

Bachelier (1900)1, a French mathematician, after observing the workings of the bond market on the French bourse in 1900, asked why bond prices move up and down. He asserted in his dissertation (which was undiscovered for 50 years) that sellers wanted to sell at the highest possible price, while buyers wanted to buy at the lowest possible price.
In other words, a seller who thought the price was too high would sell immediately at the bid price, while a buyer who thought the price was too low would buy immediately at the price offered to the market. Bachelier, therefore concluded that the bid and offer spread in the market had to represent the markets collective assessments of value of the securities. Elder (1993)2 noted that the stock market is a loosely organized crowd whose members bet
that prices will rise or fall. He noted that since each price represents the consensus of the crowds at the moment of transaction, all traders are in effect betting on the future mood of the crowd. For Elder the crowd keeps swinging from indifference to optimism or pessimism, and from hope to fear. Most people do not follow their own trading plan because they let the crowd influence their feelings, thoughts, and actions. In the stock market, the bulls and bears battle, and the value of ones investment sinks or
soars depending on the actions of total strangers . One cannot control the markets. You can only decide whether and when to enter or exit trades.

There is the tendency for one’s judgment to become clouded by emotions on entering the market crowd. These crowd-induced emotions make traders deviate from their trading plans and end up losing money.
According to Elder (op cit), trades may be based on fundamental or technical analysis. It
may also be based on hunches about economic and political trends, use of insider information, or simply based on hope. But the basic underlying factor is that the feelings of thousands of traders merge into huge psychological tide that moves the market.
Tracy (2003)3 pointed out that “if your mind is not in gear with the market, or if you ignore changes in mass psychology of crowds, then you have no choice of making money trading in stocks. All wining professionals know the enormous importance of psychology in trading. All losing amateurs ignore it”.

1.1 REVIEW OF THE NIGERIAN STOCK MARKET
The investment environment presently is so hostile to securities of companies quoted or unquoted on the Stock Exchange. It is on record that the investing public peaked to over 5% of the over 140 million strong population in 2007/2008 with the consolidation exercise conducted by banks and other financial institutions.
A watershed in public participation in the stock market in Nigeria was marked on the strength of the financial market reforms to strengthen particularly the banking sector. In 2004, the government, through its agency, the Central Bank of Nigeria (CBN) felt the country’s financial institutional structure was too small and weak to drive any meaningful economic growth. To address this, the CBN announced a holistic banking sector reform agenda aimed at implementing a process of restructuring and consolidating the operational platforms of the banks. A major plank of the policy was the increase in the minimum shareholders’ funds of the banks to N25 billion from N2.0 billion, with the overall effect of making the banks more responsive to the demands of the economy.
In compliance with the order, the banks turned to the investing public to mobilise the funds. Banks rolled out the drums and, using the media and innovative marketing strategy (including over and under the line advertising) galvanised the populace. Kurfi (2007)4 speaking on the level of awareness created by banks during the rain of public offerings captured the sudden upsurge and the underlying low market knowledge of the participants.
He said, “I cannot compare the number of investors playing the market now with what it used to be; both literates and illiterates. Some don’t even know what a dividend warrant is, some see it as receipt. I dealt with a man who came from one of the villages with a bundle of dividend warrants and he said ‘I have only been getting these receipts from the companies’. Some will come with laminated share certificates, they do not know they can trade on the certificates and they laminate them like a photo album. When companies are doing their public offers, marketers will go to the interior areas and sell the offers. After
they are sold, the investors do not know what they have bought. And so, when they receive warrants, they do not appreciate it. How I wish that the companies should be more involved in providing enlightenment to investors so that they will know the importance of what they have bought and not to leave them ignorant.” This is the picture that characterises the Nigerian stock market.
At the end of the recapitalisation exercise in 2006, 25 banks had succeeded in raising N25 billion apiece, with some pooling well above that.
Expectedly the banking sub-sector of the Nigerian Stock Exchange (NSE) became the
growth drivers of the capital market as the sector emerged the most capitalised, shoving the
traditional leader, the breweries sector, to second place. Massive Stock Investment
Due to the hype created by recapitalisation, fuelled by market operators: brokers, fund managers, analysts, many took to investing in stocks and shares. Data from the NSE show

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