The 5 Biggest Stock Market Myths Busted
Today I'm going to share the five biggest myths about stock market investing.
You shouldn't always follow conventional wisdom—especially when you're talking about stock market investing.
Once you are familiar with these myths, you will be much more comfortable with your stock picks—and as a stock market investor in general!
Myth #1. Investing In Stocks Is Gambling
Some people believe that stock market investing is simply gambling—and compare it to blackjack and roulette.
This reasoning causes many people to shy away from the stock market.
To understand why stock market investing is different to gambling, you need to understand what stocks actually are.
What Is a Stock?
Essentially, a share of a company, or a company's “stock” represents a part of a business. And you become a part owner of a business when you purchase its stock.
You are also entitled to a share of the business' profits—as you now own a portion of the business. These profits will be paid out to you in the form of dividends.
Too often, investors think of shares as simply a number on a screen, and they forget that stocks represent partial ownership of a businesses.
The particular stock you buy, and your reason for buying can greatly influence your investment returns—and ultimately, your experience with the stock market.
People who buy stocks simply because they got a tip from their mate are the ones who get burnt the worst in the stock market.
You can play the stock market like you play blackjack. But, you need to have a solid investment strategy to obtain high returns will minimizing risk—over a prolonged period.
Myth #2. Stock Market Investing Is Exclusively For Rich People
Many people see the stock market as a place exclusively for rich people.
While many of the world's wealthiest people are stock market investors—you don't have to be wealthy to start investing in stocks.
You can start investing in stocks with less than $1000!
How to Invest With Little Money
There are even micro-investing apps like Acorns that can round-up everyday purchases—and allow you to start investing with as little as $5!
Nowadays, the data and research tools previously available only to brokerages are now available for individuals to use.
You can find the annual report of any company of your choice online and start analyzing their reports!
Alternatively, you can place your money in a managed fund or an index fund—and have someone else take care of your money.
Today, stock markets allow average, everyday people to invest in stocks and build wealth!
Myth #3. Cheap Stocks Will Definitely Make A Comeback
Many investors (particularly newbie value investors) believe that cheap stocks are guaranteed to raise in price.
But before I bust this myth, I'll explain what a cheap stock is.
What Is a Cheap Stock?
A stock with a price to earnings ratio (P/E ratio) that is below the market average—is considered cheap.
The average p/e ratio of a stock on the S&P 500 since 1917 was 15.74. This means that any stock trading on US stock exchanges with a p/e under 15.74 is considered “cheap”.
Cheap Stocks Don't Always Make a Comeback
You may decide that a stock is cheap, by observing its current P/E ratio; however, this is NOT a guarantee that it will go up in price anytime soon—if at all!
Remember, just because a stock is cheap does not mean that it will make a comeback!
Myth #4. Stocks That Go Up Must Come Down
Another common investing myth is that a stock that goes up must come down.
There have been many stocks in history that have debunked his myth—by consistently rising without fail for a prolonged period.
The Coca-Cola Company
Coca-Cola increased in price nearly 20-fold over a ten-year period. Starting at $3 a share in 1988 and rising to $45 a share in 1998—without experiencing a serious drop in price during that period.
Coca-Cola slowly fell from a peak of $43 to $20 over a five-year period before making a comeback—but it never fell back to a $3 level.
The point I'm trying to make is that a stock's price is a representation of the companies' value.
And if you find a great company, with excellent management, during a booming economy—there is nothing stopping the stock from rising further!
Myth #5. Some Knowledge Is Better Than None
With most things, it's typically better to have some knowledge over none; however, this is not true for the stock market.
It's crucial that as a stock market investor, you have a clear understanding of what you are doing with your money.
Stock market investors who do their homework are the most likely to succeed—and the least likely to suffer a major loss.
If you don't have the time to learn about the stock market and how it works—you should consider employing someone else to manage your funds.
The cost of investing in something that you don't fully understand far outweighs the cost of hiring an investment advisor.
These are the five biggest stock market myths. I hope that after learning about these common investing myths you feel more confident in your own investment strategy.
If you'd like to learn more about stock market investing visit our How to Invest In Stocks For Beginners post.
What do you think of these stock market myths?