The 6 Biggest Stock Market Myths and How to Avoid Them
Digital tools have made investing much easier than in the past, but a lot of investors still believe in some myths about investing. These misconceptions may be very pricy, especially when they lead investors to wrong investment decisions.
By presenting the most common investing myths, we would like to help you stay away from them and make more reasonable and grounded decisions.
Table of Contents
1. You need a lot of money to invest.
This is a very common misconception. You don’t need much money to invest. What’s more, it is even better to start off with a few hundred dollars. Especially as a first-time investor, even if you have used some stock simulators, you may need some time to learn how you react to real-life investing. Real money is not the same as virtual money so it is better to test drive your investing skills. Before putting at stake millions of dollars, it is better to invest a few hundred dollars and see how well they will perform. Trading commissions are currently really low or none so additional costs of such a test drive are almost nonexistent.Back to top
2. Investing in Stocks Is Like Gambling
Some investors stay away from the stock market because they perceive it as a form of gambling. However, equating stock market investing to gambling is a total misconception. Investors should understand that buying shares of a company means purchasing ownership in this company. By buying shares, they become owners of the company and have a claim on the assets, debts, and a small fraction of its profits. perceiving buying shares only as trading socks is limiting your perspective. To be successful at predicting the value of stocks in the future, investors need to analyze company metrics, financial statements, stock charts, company news and make conclusions about how these factors will influence the future earnings of the company and eventually stock prices. Generally, determining the value of a company is a multifaceted issue since a lot of variables influence it. Especially, predicting short-term price movements can be a challenge, but in the long term stock prices should reflect the true value of the company. Therefore, investing strategies based on hard data such as financial statements are far from gambling.Back to top
3. You Should Always Buy at or near the Low.
Every investor hopes to buy stocks when they are just about to rise from the lowest point, however, it is usually a big challenge to spot the market bottom. To reduce the influence of price volatility, you can divide up the money across periodic purchases of the target securities, instead of investing a significant amount of money at one time. This strategy, called dollar-cost averaging, may help limit the risk of purchasing stocks too high or acquiring stocks with no chances to recover. Generally, we should avoid investing in one company by putting at stake big amounts of money at one time. Of course, there is a slight chance we can win a lot, but the odds are not in our favor. Level-headed investors who want to achieve long-term success manage their risks by diversifying their investment portfolio.Back to top
4. You Should Buy Securities and Hold them Forever.
Some investors believe that they should buy and hold forever. However, we should remember that economies change, and even solid companies may have difficulties that can drive their stock prices down. Therefore, we shouldn’t purchase stocks and forget about them. It is advised to review your long-term investment portfolio at least a few times a year in order to check if your initial goals are still attainable.
However, when our chosen investment strategy is a long-term strategy, we should avoid following each rise and fall in our holdings. It may protect us from emotional reactions to sudden market swings. When you stick to a regular schedule for reviewing your portfolio, your decisions will be based on consideration of the hard data, not emotions. All in all, striking a balance is the best solution. Try not to overlook your investments, but at the same time, don’t put yourself on an emotional roller coaster by reacting to each price drop or rise.Back to top
5. Fallen Stocks Will Finally Bounce Back Up
There are some investors, especially not very experienced, who think that stocks falling dramatically are always a good buy. Such a sharp drop, called a falling knife, is usually an aftermath of other dramatic circumstances like unstable world situations such as health pandemics. Such a situation seems to be a window of opportunity, but we are never sure how deep the knife will fall and the stock prices will stop falling. There is the Wall Street adage “If you try to catch a falling knife, you will get hurt.” Would you buy a stock that remained at $100 last year and has just fallen to $20 per share? The majority of investors, especially inexperienced ones, would say yes. They assume that the price will go up again. However, that is a questionable assumption and shouldn’t be the core of any investment strategy as investing is not the same as trading where market price fluctuations are the main drive of making trading decisions.Back to top
6. You Should Avoid Stocks While Saving for Retirement.
There is a popular myth that investors who are saving for retirement should shy away from buying stocks and focus on purchasing bonds. Certainly, stocks are riskier, but adding them to your portfolio and maintaining a mix of bonds and stocks may help you grow it faster. will enable you to a faster growth rate. You need to know how much risk you are able to accept, but a good rule of thumb is that stocks should not exceed 20% of your whole investment portfolio. You may stick to a conservative investing style that prioritizes the protection of capital and invest in low-risk securities such as money market securities and fixed-income securities, but even then you may invest in stocks. To reduce the risk to the minimum, you may invest in blue-chip equities that have a solid history of performance and come from established and highly-reputed companies that pay dividends. Blue-chip stocks are frequently large-cap stocks, which means they have a market capitalization value of 10 billion or more. Examples of such companies are Apple, Amazon, Walmart, or Facebook.Back to top
The biggest challenge of investing is that there is no one simple answer on how to invest and be successful. If you want to be a full-time investor, you need to have enough time to learn and practice what you have learned. Staying away from the myths and misconceptions mentioned in this article will help you become a more effective investor.Back to top