Sometimes when I tell people that I invest in stocks, I get weird stares and some comment that I am “gambling” and that I should put my money in a property instead of “betting” on stocks. The misconception some people have about investing in the stock market is really alarming. Here are five of the biggest misconception about investing in stocks.
1) Investing in stocks is gambling
This is perhaps the most common misconception there is about investing in stocks. To buy a stock is to buy a part of a business. If you truly understand and believe in a certain brand or business, you could purchase its stock on the stock market if it is publicly listed. A true investor takes the time to understand the business before deciding to invest in a company at a certain price. If investors believe that a certain company will do well over time, he can purchase the stock at present prices in anticipation that the value of the company would increase in the future. Investing creates wealth. A company lists on the stock market to sell off part of its ownership for money that can be reinvested in the business. Gambling is a zero-sum game. It merely takes money away from the loser and hands it over to the winner. If proper research is done, true value can be found in the stock market.
2) Only the rich can afford to invest in stocks
This is a common excuse that some people use when asked about why they are not investing in stocks. It does not take a lot of money to get started. You can buy any amount of shares based on your budget. For example, Apple is currently trading at about USD$150. If you had USD$5000, you could purchase about 30 Apple stocks. It would cost you about USD$4500 and you should be comfortably within your budget even after paying the brokerage fee. These days brokerage fees are extremely low and just about anyone can open a stock trading account with the multiple platforms available.
3) If a stock crashes, it will go up eventually
The fact that the stock price crashed means that there is something fundamentally wrong with the company. Just because a stock price is at a 52-week low does not mean that it is ready for a rebound. Look at companies like BlackBerry where at its peak was trading at about USD$230 in 2007. It currently trades at about USD$10. It has been hovering around this price since 2012. If you had invested in Apple in the same period you would have done so much better. BlackBerry’s business had little to no upside since 2008 and it was clear to see that they, and Nokia, were destined to fade into oblivion.
4) Stocks that go up must come down eventually
The converse is also not true. Just because a stock has hit its all time high does not mean that it is expensive. Take a look at companies like Berkshire Hathaway and more recently Apple. Since 2007, Apple has seen its stock go from about USD$17 to about USD$150 currently. Having great products and sound management means that companies like Apple have the ability to push its stock price higher.
5) I do not need much knowledge to understand the stock market
Markets are ever evolving. Growth sectors are constantly changing and different sectors use different metrics to find value in companies. For example, using the P/E ratio of a technology company to benchmark against a pharmaceutical company would be incorrect. Also, understanding a business takes time and a lot of effort. Fortunately, there are many resources available to investors over the Internet. Research is key to successful investing in stocks.
To summarise, investing in stocks requires hard work to be put in. Research is key and never purchase a stock just because of an “insider tip”. More often than not such tips are inaccurate. To trade on a hunch is not investing at all. Investors should develop a strategy and stick to it. If in doubt, seek professional advice.