6 Common Misconceptions People Have about the Stock Market
If you are unfamiliar with the stock market and investing in general, you might have plenty of preconceived ideas about how stocks work. Many people end up jumping into the markets with no prior experience and with tons of false information about trading. These people either quickly become disillusioned once they find out the truth and don’t get the results they wanted, or get taken advantage of by people who may have different plans for their money. However, it’s important that you separate the truth from fiction and understand the ins and outs of stock market investing before you put your chip in. Here are some of the most common myths and misconceptions people may have about the stock market.
It’s All a Gamble
This is often the most common misconception that is held by people who have little to no idea about what the stock market is about. Funnily enough, this myth is often entertained by people who have no intention of ever investing in the stock market and may have a negative view of trading in general. But trading is much more than gambling. While it’s true that the markets can get hectic and unpredictable if we’re talking short term, it’s possible to spot which way the markets are heading by looking at raw data and analytics.
With the advent of new financial instruments like ETFs that allow you to track particular sectors, predicting the markets and getting steady returns with less risk is easier than ever for the average investor. You can decide to track sectors that you feel show great promise for the future, like the tech sector, for instance. However, if you’re still unsure about which stocks or ETFs to pick, there are many experts you can learn from, like Michael Robinson investor, who have solid track records and specialize in tech stocks primarily.
If you happen to know and understand a market on a deeper level, you might also have an edge over other traders as well and be able to identify trends, developments, innovations and new players in the industry better. You might be able to spot companies who may have great potential or those to avoid, which takes the gambling aspect practically out of the equation.
You Have to be a Genius to be Successful Long Term
Warren Buffett often says that you can afford to give away a few IQ points and still be a great investor. Yes, there are a lot of numbers and analytics involved in trading. However, with the right strategy and by concentrating on the most important metrics, pretty much anyone can learn how to trade stocks efficiently.
You Need a Lot of Capital to Get Started
Again, that is not true. While it was true at one point, the market has evolved greatly and there are more opportunities than ever for people with limited capital to start investing. In addition to apps like Robin Hood that have greatly democratized trading, you also have tons of great discount brokers that will allow you to make multiple trades with very low commissions.
All you need in this day and age is an internet connection, a little bit of startup capital and the right trading platform and broker to get started. Furthermore, financial information is much more accessible that it once was. Advanced metrics and information on companies used to be reserved for brokers, but nowadays, everybody can get access to the same information and use it to make trades.
Market Forecasts Are Always Reliable
Market forecasts should be taken with a grain of salt and there are just too many different forces influencing the market to take them as gospel. The truth is that you should only use these as a tool to warn you of possible indicators that could foretell a particular trend. But you shouldn’t expect forecasts to be 100% accurate and you should always use other indicators when making your decisions.
Prices Always Go Back Up
For some reason, a lot of people think that any company whose stock has been stagnant for a while will eventually go back up. But that is one of the most dangerous misconceptions you could have about the stock market. Another variation is when people think that “buying the dip” is a viable strategy, when in all actuality, they’re catching a falling knife.
Newsflash people, companies go under all the time and don’t think that just because a stock is dirt cheap at the moment, you just made a great find. Some companies just have poor management, are getting run out of the market, or just have no direction and are being outclassed. So, don’t automatically assume that every underperformer is a gem and look at the bigger picture before you pick your stocks.
Prices Always Go Down Eventually
At the other end of the spectrum, there is this commonly held belief that any stock that seems to be uncharacteristically high will always go back down. Again, that is a huge misconception. For instance, if you thought that Berkshire Hathaway’s stock would have fallen back after it hit the $15,000 mark after its meteoric rise from around $7,000 about five years earlier, you would have been terribly wrong today. The truth is that some companies just provide great value to investors, and even if they might seem overpriced to the layman, the stock price is usually very well justified.
However, this doesn’t mean that stocks never undergo corrections; the stock price will usually be a direct reflection of the company’s performance, and if a company is properly managed, there is no reason to imagine that the stock will eventually fall down due to some mysterious financial gravitational pull.
Now that you have a clearer idea of what the stock market is and isn’t about, it will be easier to come up with a plan and be a bit more financially literate the next time you meet with a financial planner.