Noise Trader Risk

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Noise Trader Risk

The risk of a loss on an investment that comes from a noise trader. A noise trader is an investor who makes decisions based on feelings such as fear or greed, rather than fundamental or technical changes to a security. If enough noise traders panic, they can drive down the price of the security unnecessarily. Suppose an investor owns 1,000 shares of a stock and they are currently at $50 per share. If noise traders overreact to bad news, the price could drop to $40 per share without any fundamental justification. This costs the investor $10,000. The possibility that this could happen is noise trader risk. See also: Behavioral economics.