Title: Noise Trader Risk Definition
Headings: Noise Trader Risk
Noise Trader Risk
What Is Noise Trader Risk?
Understanding Noise Trader Risk
Example of Noise Trader Risk

Content: Noise Trader Risk Definition
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Noise Trader Risk
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Lucas Downey is the founder of personalfinancekid.com, co-founder of MAPsignals.com, and an Investopedia Academy instructor. Learn about our editorial policies
Lucas Downey
Updated May 13, 2021
What Is Noise Trader Risk? Noise trader risk is a form of investment risk associated with the decisions made by so-called noise traders. The higher the volatility in market price for a particular security, the greater the associated noise trader risk—that is, the risk associated with largely uninformed traders who trade on the noise in the market instead of the signal. These traders are largely trend following, emotional, and undisciplined. Behavioral finance researchers have attempted to isolate this risk in order to explain and capitalize upon the sentiment of the majority of investors. Noise trader risk is assumed to be more readily found in small-cap stocks, but has also been identified mid- and large-caps. Also, as the media pumps out more and more content, there tends to be more headline risks for stocks and markets. The noise can sometimes move stocks and markets in the near-term. However, it is important to understand that some noise is designed to stir emotions.