The 5 Biggest Stock Market Myths


When fiascos such as the Enron bankruptcy, auditing scandals and analysts’ conflict of interest occur, investor confidence can be at an all-time low. Many investors wonder whether or not investing in stocks is worth all the hassle. At the same time, however, it’s important to keep a realistic view of the stock market. Regardless of the real problems, common myths about the stock market often arise. Here are five of those myths.
1. Investing in Stocks Is Just Like Gambling.
This reasoning causes many people to shy away from the stock market. To understand why investing in stocks is inherently different from gambling, we need to review what it means to buy stocks. A share of common stock is ownership in a company. It entitles the holder to a claim on assets as well as a fraction of the profits that the company generates. Too often, investors think of shares as simply a trading vehicle, and they forget that stock represents the ownership of a company.
In the stock market, investors are constantly trying to assess the profit that will be left over for shareholders. This is why stock prices fluctuate. The outlook for business conditions is always changing, and so are the future earnings of a company.
Assessing the value of a company isn’t a simple practice. There are many factors involved that the shortterm price movements seem to be arbitrary (professors call this Random Walk Theory); nevertheless, within the very long run, a business is just well worth the present price of their proceeds it is likely to make. From the brief term, a corporation may survive without profits on account of the expectations of prospective earnings, however no corporation may fool investors indefinitely – finally an organization ‘s stock price might be anticipated to demonstrate the genuine value of their business.
Betting, to the other hand, is an zero-sum video game. It only takes money from the failure also gives it into successful. No importance is created. By investing, we boost the general wealth of a market. As organizations assert, they increase productivity and develop services and products which may make our own lives better. Don’t confuse investing and creating wealth with gambling’s zero-sum game.
2. The Stock Market Is an Exclusive Club For Brokers and Rich People.
Many market advisors claim to be able to call the markets’ every single turn. The simple fact is that virtually every study done with this topic has shown why these claims are not false. Most market prognosticators are notoriously incorrect; more over, the appearance of the web has made the industry far more receptive to people than ever . All the research and data tools currently accessible only to brokerages now are available for individuals to make use of.
Actually, folks have a benefit over institutional traders since individuals are able to afford to become more longterm oriented. The huge money managers are under extreme pressure to acquire high yields annually. Their operation can be therefore inspected they are able to ‘t invest in opportunities that take some time to develop. Individuals have the ability to look beyond temporary downturns in favor of a long-term outlook.
3. Fallen Angels Will Go Back up, Eventually.
Whatever the reason for this myth’s appeal, nothing is more destructive to amateur investors than thinking that a stock trading near a 52-week low is a good buy. Think of this in terms of the old Wall Street adage, “Those who decide to try to grab a falling knife just become hurt. ”
Suppose you are looking at two stocks:
XYZ made an all-time high last year around $50 but has since fallen to $10 per share.
ABC is a smaller company but has recently gone from $5 to $10 per share.
Which stock would you buy? Believe it or not, all things being equal, a majority of investors choose the stock that has fallen from $50 because they believe that it will eventually make it back up to those levels again. Thinking this way is a cardinal sin in investing! Price is only one part of the investing equation (which is different from trading, which uses technical analysis). The goal is to buy good companies at a reasonable price. Buying companies solely because their market price has fallen will get you nowhere. Make sure you don’t confuse this clinic together with value investing, that will be buying highquality businesses which are undervalued by the marketplace.
Below is just a graph of Nortel’s reduction. Imagine just how much you would have lost had you bought Nortel because it stored hitting new highs!
This graph was furnished by
4. Stocks That Go Up Must Come Down.
The laws of physics don’t apply from the stock exchange. There’s no gravitational push to pull on back stocks to . Over a decade back, Berkshire Hathaway’s stock price went from $6,000 to $10,000 per share at only a bit more than annually. Perhaps you have thought this stock was about to come back to its lesser original place, you’d have missed on the following rise to $70,000 per share within the subsequent six decades.
Below is just a graph of Wal-Mart in 1997 to 2000. We’ve circled everytime that the stock graph struck immunity to attaining a fresh high. Those investors that were awaiting for that stock to keep coming straight back to ground will ‘ve missed from a yield of 500 percent or longer.
Wal-Mart is 1 instance of an organization which has dominated its industry by being advanced and creating value for both customers and investors.
This graph was furnished by
We’re not attempting to let you know that stocks never experience a correction. The purpose is the stock price can be really a manifestation of the provider. If you locate a fantastic business run by exemplary supervisors, then there’s no reason that the stock won’t keep on going up.
5. A Little Knowledge Is Better Than None
Knowing something is generally better than nothing, but it is crucial in the stock market that individual investors have a clear understanding of what they are doing with their money. Investors who really do their homework are the ones that succeed.
Don’t worry, should you neglect ‘t have the time to fully understand what to do with your money, then having an advisor is not a bad thing. The cost of investing in something that you do not fully understand far outweighs the cost of using an investment advisor.
The Bottom Line
Forgive us for ending with more investing clichs, but there’s another old adage worth repeating: “What’s obvious is demonstrably erroneous. ” This usually means that knowing just a tiny piece will just have you after crowd just like a lemming. Like anything , successful investment takes work and energy. Think about a partially savvy invest or because a partially savvy physician; the mistakes might be badly conducive to your fiscal wellness.