Common Stock Market Myths Busted

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One of the main reasons many people stay away from stock market investing or sit on a pile of losses is their belief in commonly heard myths.. More often than not, it’s the blind belief in tons of misconceptions surrounding the stock market that keeps existing and potential investors from getting the most out of it and earning good returns.

While, on the other hand, it is those who close 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 want to belong to the second category, i.e. successful investors, it is important to bust these common stock market myths before and even after you dip your feet into the world of stocks.

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Read also : How is stock investing different from mutual funds?

1. The stock market is like gambling

One of the first things that many people think of when they hear about the stock market is gambling, right? This is also why these people criticize the stock market and advise others to stay away from it.

But this is both unfair and wrong. While gambling is a game of luck/chance, investing and trading in the stock market is driven by multiple factors such as the economic landscape, company performance, timing of purchase and sale of shares, etc. Thus, besides external and uncontrollable factors such as the economic landscape, it is the knowledge, skills and decision-making of the investor and trader that determine the gains/losses. It is not luck or luck that will determine the outcome, which is the case with gambling.

2. Base your stock selection decisions on past performance

Another misconception held by tons of stock investors is that past performance should form the basis of stock picking.. What these people don’t realize is that past performance, as the name suggests, indicates how that stock or fund has performed in the past, which in no way guarantees future returns! In fact, assuming that past performance will repeat itself in the future is what often leads many investors to choose the wrong stocks for their portfolios.

While it’s good to look at past performance to get a fair idea of ​​how a stock has performed in different market cycles and economic phases, make sure that research on financial performance, future plans, portfolio , etc of the company forms the core basis when choosing stocks.

Stock market myths
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3. Blindly opting for “winning” stocks

Similar to the previous point about not basing your stock picks on past performance, it’s equally important not to just blindly search for “winning” stocks. Going for a stock because it has been a “winning” stock that has performed well in the past or even recently or received a positive image in the news or media, can do more harm than good, especially if it does not match your risk appetite and investment portfolio.

First, past “winning” performance does not guarantee similar returns in the future, and second, if it turns out to be a high-risk security, as noted above, your chances of losing are higher relative to another security that may have the potential to provide similar returns with lower risk.

4. High Risk Equals High Profit

The higher the risk you take, the higher the returns. This is common advice that many novice investors are led to believe when they dip 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 compared to a low-risk stock. So, don’t just blindly hunt for high-risk stocks amid greed to get super high returns. So when investing in stocks, it’s important to first understand your risk appetite and then invest accordingly in stocks whose appetite allows you to take the associated risk.

5. The stock market is only conducive to short-term gains

Another commonly heard and believed myth is that the stock market is only suitable for short term gains and not long term.. While it’s true that many people trade the stock market for short-term gains, that doesn’t take away from the fact that the market is also suitable for long-term investors. In fact, holding your stocks for the long term can earn you high returns. It’s about being patient and knowing when to buy, hold and sell the stock.

Also, don’t be a blind follower of the crowd and don’t let your emotions anchor your decisions. After all, successful investors trust their knowledge and skills rather than doing what everyone else is doing! And being patient is one of the greatest virtues of a successful investor.

6. Buy only cheap or low-priced stocks

It is true that as an investor you make money when you buy low and sell high. It’s simple. But that doesn’t mean you should only buy low-priced stocks and avoid those that are priced in three or four figures or even higher.

Remember that a company’s stock price is not only determined by its financial performance, but also by its capital structure. In simple terms, stock price is the market capitalization of a company divided by the number of shares issued by the company. Given this, a company’s stock price may seem too low, not because it is less valuable, but simply because it has too many shares, either because of capital paid out significantly, or because of stock splits.

On the other hand, a company with small paid-up capital and no stock splits may have a very high share price. That doesn’t mean it’s expensive and you should avoid it. In fact, this “higher” stock price may have the potential to generate high returns in the future compared to a low-priced security whose growth potential appears low in the stock market. So instead of focusing on high or low stock price, focus on basic metrics like financial performance, P/E ratio, future plans, etc. of the company when selecting its action.

Also Read: Why Stock Market Falls Are Actually A Buying Opportunity

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