The behaviour and attitude of the investors impose significant impact on the performances of the stocks in the market. When the sentiment of the investors is high, then there is a greater issuance of common stock. When the sentiments are low, then the supply exceeds the demand that results to the underperformance of the stock market. In this situation, the price of the stocks increases and under-pricing decreases because the issuers take the advantage. The trades in the market are affected by the opinions of the investors which lead to crashes and bubbles. The investors in the market focus on the present and neglect the future.
The consequences are crashes and bubbles due to the increase in the prices in future, and when the price of the stock reaches its critical value, and then the price of the stock starts falling. In most cases, entrepreneurs and managers overinvest into the market because of their confidence (Malliaris, 2005). The participants in the market who have attained success in different fields are more confident in comparison to other participants in the market. They become more confident in their knowledge and skills. However, it has been found that the investors who invest more in the market gain more experience. The investors who are having greater experiences in the financial market are overconfident. The behavioural finance analysis relies on the overconfidence of the investors in the market imposing a significant impact on the stock market.
Managers believe that their success is based on their abilities and they overestimate their capabilities. It is evident that the listed companies along with the brokers and agents intentionally create hype in the market so that the investors and shareholders, especially the naïve market participants, are misguided within the stock market and invest in wrong stocks and eventually incur severe losses. As the stoke brokers and companies create mispricing in order to trap the investors who are benefitted, whereas the investors loss huge amount of money. The stock brokers biased behaviour cause to the financial loss of the investors.