How dividends and investor psychology affect stock prices

While many companies pay dividends to their shareholders, the reality is that dividends and investor psychology affect prices of underlying stocks in various ways. The history of a dividend of any stock generally plays an important role to the popularity of that stock. Through stock analysis, an investor can be able to know how dividends have impacted the prices of specific stocks. But the payment and declaration of a dividend also has predictable and specific effects on the market prices. The reason why investors buy and retain shares of specific stocks is that they are driven with a possibility of establishing a continual investment income.

Although this motivation is solely economical, the fundamental beliefs about a company’s potential profitability are the factors that impact prices of a stock. Basically, dividends will always affect how investors positively think of investing in dividend stocks. But for an investor to invest in dividend stocks, the investor must first understand all the mechanics of financial or stock markets as well as basics of how a dividend works. In essence, the stock market is a joint result of decisions made by investors. While stock prices are mostly based on general value of an issuing company, the constant fluctuations in this market are largely determined by investor psychology.
For example, if an investor is of the opinion that a certain company has a bright future, the investor will invest in the company immediately through dividend investing to start reaping maximum profits. If several investors carry the same opinion, this will see an increase in investment, which will drive the company’s stock price up. Conversely, investors who think that stock prices for specific companies are about to go down will quickly sell their shares to avoid making losses. Similarly, when a company in the stock market declares dividends, its stock prices will also increase. If the company cuts dividends, its stock prices will go down.