One of the biggest reasons a lot of people either stay away from stock market investing or sit on a pile of losses is their belief in the commonly heard myths. More often than not, it’s the blind belief in tons of misconceptions surrounding the stock market which prevents existing as well as potential investors from making the most of it and earning good returns.
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Whereas, on the other hand, it’s those who shut the door to these myths and instead believe in their knowledge and practical thinking who tend to stand out from the crowd and become successful investors.
So, if you wish to belong to the second category, i.e. successful investors, it’s important to bust these common stock market myths before and even after dipping your feet into the world of stocks.
1. Stock market is like gambling
One of the first things that come to many people’s minds on hearing about the stock market is gambling, right? That is also the reason why such people criticize the stock market and advise others to stay away from it.
But that’s both unfair and untrue. While gambling is all about the game of luck/chance, investing and trading in the stock market is driven by multiple factors such as economic landscape, company performance, your stock purchase and sale timing, etc. So, besides the external and uncontrollable factors like the economic landscape, it’s the investor and trader’s knowledge, skills and decision making which determine the gains/losses. It’s not about a chance or luck that will determine the outcome, which is the case with gambling.
2. Base your stock picking decisions on the past performance
Another big misconception believed by tons of stock market investors is that past performances should form the basis for stock picking. What such people fail to realize is that past performances, as their name suggests, indicate how that stock or fund has performed in the past, which in no way guarantees future returns! In fact, assuming that past performance will replicate in the future is what often results in many investors picking the incorrect stocks for their portfolios.
While it’s fine to look at the past performances to get a fair idea of how a stock has performed in varying market cycles and economic phases, ensure the research about the company’s financial performance, future plans, portfolio etc. forms the crux of the base when picking the stocks.
3. Blindly going for the ‘winning’ stocks
Similar to the previous point on not basing your stock pickings on past performance, it’s equally important to not just blindly go after the ‘winning’ stocks. Going for a stock because it has been a ‘winning’ stock that has performed well in the past or even recently or has been given a positive picture in the news or media, can do more harm than good, especially if it does not match your risk appetite and investment portfolio.
Firstly, the past ‘winning’ performance does not guarantee similar returns in future, and secondly, if it turns out to be a high-risk stock, as said earlier, your chances of losing are higher vis-a-vis some other stock that may have the potential to provide similar returns with lesser risk.
4. High risks equates to high profits
The higher the risk you take, the higher the returns. This is common advice many novice investors are made to believe when dipping their feet into the stock market. But that’s not entirely true. Not only do high-risk stocks never guarantee high returns, they even involve a higher risk of loss versus a low-risk stock. So, don’t just blindly go after high-risk stocks amidst the greed of getting super high returns. Thus, when investing in stocks, it’s important to first understand your risk appetite and then accordingly invest in the stocks whose associated risk your appetite allows you to take.
5. Stock market is only apt for short term gains
Another commonly heard and believed myth is that the stock market is only suitable for short term gains and not for the long run. While it’s true that many people trade in the stock market for short term gains, that does not take away the fact that the market is equally apt for long term investors as well. Holding your stocks for the long term, in fact, can reward you with high returns. It’s all about being patient and knowing when to buy, hold and sell the stock.
Moreover, neither be a blind follower of the crowd nor let your emotions anchor your decisions. After all, successful investors trust their knowledge and skills rather than doing what everyone else is! And being patient is among the biggest virtue of a successful investor.
6. Only buy the cheap or low priced stocks
It’s true that as an investor, you make money when you buy low and sell high. That’s simple. But, this doesn’t mean that you should only buy stocks with low trading prices and avoid those that quote in three or four digits or even higher.
Remember, a company’s stock price is not only determined by its financial performance but also by its capital structure. In simple terms, the share price is the market capitalization of a company divided by the number of shares issued by the company. Given this, a company’s share price may seem too low not because it’s less valuable but simply because it has too many shares either due to a large paid-up capital or through share splits.
On the other hand, a company with a small paid-up capital and no share splits may have a very high share price. That does not mean it’s expensive and you should avoid it. In fact, that ‘higher’ share price may be holding the potential to give high returns in future vs a low priced stock whose growth potential seems bleak in the stock market. So, instead of focusing on the high or low price of the stock, focus on the basic parameters like financial performance, P/E ratio, future plans etc of the company when picking its stock.
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