It was believed that stock market trading is suitable for people having an enormous amount of wealth at their disposal for a long duration. This belief was emanated from old wisdom which stated that gentlemen preferred investing in bonds. The prime reason for this was that bonds are much flexible and safe, especially for small scale retail investors.
This brings us to the fact that many myths have affected investors’ stock market investment decisions. Most traders and investors have become a victim of these myths prevailing in the stock market. These myths are based on incomplete knowledge that holds for a specific time or only in a particular context.
COMMON STOCK MARKET MYTHS
Some of the common stock market myths that are believed by most of the investors/traders, especially beginners, which need to be dispelled before investing are as follows:
- Stock market investments are only for the rich: It has always been believed that the stock market is for people who are filthy rich. However, the fact is, you need not be filthy rich to invest in the stock market. This is one of the biggest myths that prevents beginners from taking their first step towards trading and investment. For instance, you can enter the stock market by buying an SBI share, for example, which trades at say Rs.250, or start SIP with a minimum amount as low as Rs.500. Always keep in mind that wealth creation from the stock market does not require huge sums of money. Rather you need to start early and be consistent with your investments.
- Nobody earns in Equity Market: We have often heard people saying that nobody makes a profit in equity markets. However, if we go with the facts, this is an absolute myth. In reality, stock market investment is like a Zero-Sum Game. If you are not aware of what the Zero-Sum Game is, it means that one person’s profit is another person’s loss. Hence, the stock market does not create any fortune. If we assume that 1000 people are investing in the stock market, half of them will be on the winning side, while the other half will be on the losing side. However, this statement is more relevant to a volume front. Whether you will be on the winning side or the losing side is decided by when you enter and exit the market. Thus, gains in stock market investments are all about timing.
- Investing in the stock market is too risky: Many people shy out from investing in the stock market as they mistakenly think it to be similar to gambling. The reality, however, is not the same. Investing in a single stock is surely risky. But, investing in a broad market portfolio for years is not as risky as it appears to be in the first instance. There is some risk in investing in the stock market as some investments are riskier than others. However, the fact is that the market moves in cycles and is filled with highs and lows.
- Gold is the safest investment: For years, gold has managed to gain the investors’ attention. If we ask someone about safe stock market investment, gold will surely top the charts. The gold investment thesis is based on the idea that fiat currencies will lose value due to “money printing”. While this may be true to some extent, the thesis altogether is flawed. Most people do not invest in fiat currencies for the long term, but in stocks, equities, and other assets. Gold, as an investment option, adds stability to your portfolio. And while investing in gold may protect you from losing your money, it will not offer you reliable returns. One cannot earn interest or dividend on gold, and hence its intrinsic value does not increase.
- Well-known companies are good for investment: Many market analysts suggest buying the stocks of the companies they like or respect. Warren Buffett once said, “I don’t invest in companies I don’t understand.” Hence, we can conclude that successful investing is about finding the right stock or other assets. Popular companies are often overvalued, making strong returns unlikely in the future. Furthermore, they attract heavy competition, eventually eroding the margin. Quantitative research has shown that stocks that steadily compound earnings generate more-reliable long-term returns in the long run.
Traders and investors, especially beginners, should be wary of investment myths. There are many myths that have been spread among investors when it comes to stock market investments. For most of the part, as an investor, you should be wary of any rules that are considered absolute. Successful investing is all about taking calculated risks and reduce to a simple set of rules rather than complicating the process. Being aware of these myths and avoiding them can take your investment game to the next level.