Last Updated on 8 months by Mohit Pareek
There are many myths about the Stock Market. Due to all these myths, most people either avoid investing in the stock market and even if they invest, they lose money. It is proven that more than 90% of investors lose money in the stock market.
You must understand all these myths about the stock market so that your investment decisions will be based on facts only, not on these myths.
Let us understand some of the common myths about the stock market
Myth 1: Stock Market is Gambling
Out of the so many myths about the stock marker, one of the most popular one is that most people don’t know anything about the stock market and how the stock market works. Neither they ever invested any money in the stock market nor do they even try to understand the basic concept about investing.
But there is no fault of theirs in this. It has been settled in the mind of the people that the stock market is a kind of gambling and it is not right to invest money in stocks. They feel that the lucky person can only earn money in this stock market gambling.
But the reality is different. The lucky person does not always earn money in the stock market, but to earn money in the stock market, the right decision, patience, knowledge and research are required.
A stock is not a lottery ticket, rather it is a part of the ownership of a company. When you buy the stock of a company, you become the owner of that company in proportion to the share of stock you bought. And when you start buying more stock of that company then your ownership in that company also increases in the same proportion.
The price of a stock depends entirely on the business of that company. If the business of the company grows then its share price and the value of your investment also increases and vice versa. For a business to grow, every business needs time.
To earn money, you need to invest in different stocks so that your risk is minimized. If you invest only in shares of the only company then it will be very risky for you. Furthermore, if you invest without doing proper research, the chances of losing money will also increase a lot.
If you invest your money after research then the stock market will help you to build wealth. But if you invest incorrectly then it can also be dangerous for your money.
Myth 2: Investing in the Stock Market is very complicating.
This myth among all the myths about the stock market seems bit true because most investors don’t know how to invest in the stock market and they make a lot of mistakes which hurt their returns.
This does not mean that investing in the stock market is indeed very complex and investors can never understand the right way to invest in the market. But if the investor wants to become a successful investor then it will require a lot of research, discipline and patience.
Investing is simple but not easy. This means that there are two parts to investing in the stock market. In the first part, investors have to choose the right stock and in the second part, investors have to invest in that stock for a long period.
It is very easy to find a good stock but it is very difficult to invest in that stock for a long period. Many times, investors are successful in choosing the right stocks but fail to stay invested for a longer duration. Due to the lack of patience, most investors are unable to give their investment time to grow, which is very important to get the benefit of the power of compounding. They become impatient with short-term volatility and start selling their shares
Therefore investors mustn’t blindly invest in the stock market. One should never follow tips and advice from others without proper research. By doing research and study about the stock market, every investor can know the concept of the stock market and invest in the stock market will never be complicated for him.
Myth 3: Stock Market is only for the rich.
There is a common misconception among us that only rich people can invest in the stock market. People think that you need a lot of money to invest in stocks.
But this is not true. You don’t need too much money to invest in the stock market. You can simply start investing with little money.
If you invest in a portfolio, whether you invest 1,000 rupees or invest 10,000 rupees, you will get the same percentage of profit in your investment. Although you will earn more by investing more money, it does not mean that you cannot start investing with little money.
It is true that if you invest more money in the stock market, you can diversify your portfolio with quality stocks which are not possible with little money. But if you are not investing in the stock market because you don’t have so much money, then you are doing a mistake.
If you want diversification but don’t have so much money, then you can invest through mutual funds. Nowadays you can start investing through a mutual fund with very little amount.
Myth 4: You need to be expert to invest in the stock market.
There is a common myth that only highly educated and a stock market expert can manage their portfolio in the stock market. You need to be expert to earn money from stocks. This is the reason most people avoid investing in the stock market thinking that they are not so smart to understand the ups and downs of the share market.
But this is not true. You don’t need to be smart to invest in the share market. You only need to understand some basic concepts. Before investing in any share you need to do some research.
There is no need to become an expert to earn money in the stock market. Patience and discipline are needed. Along with this, you have to control your emotions. Most investors do not lose their money because they are not experts; they lose money because they are unable to control their emotions.
Many times investors pick the right shares but they get nervous when the price of that share falls. They get so nervous that they forget all their research and study. Due to this fear, they either lose their money by selling their shares at a lower price or they sell their shares at a much lower profit.
This is the reason that patience is very necessary to get success in the stock market.
Myth 5: Accumulating Stocks on every dip.
Many people believe that accumulating more stock at every dip reduces the average cost of the stock. A lower average cost of a stock will yield higher returns when the stock price begins to recover.
But this is a half-truth. Not every falling stock needs to recover again. You have to find out why the stock price is declining, what is the real reason for the fall in stock price. There is a difference between the correction of quality stocks and worthless stocks crumbling.
Sometimes the stock market falls due to change in international trade policies, changes in government policies, the formation of new government etc. In these situations, even the business of fundamental sound companies decline. At that time you should do your research. If you find that the fall in the share price is due to external reasons but the company can generate good returns, then you should start accumulating more and more stock of that company in each dip. So that when the market recovers, you can earn higher returns.
On the other hand, if the stock price is falling because the business is going through difficult phases and the chances of recovery are very low, you should not buy shares of these companies. Just remember how Kingfisher, Deccan Chronicle, Satyam and many other businesses which were counted in good companies, did not exist today.
Accumulate quality stocks only when there is a possibility of recovery and avoid buying all those stocks which are unlikely to recover.
Myth 6: I am too old to invest in the stock market.
Most people believe that after crossing a certain age limit i.e. 40 years it is not a good decision to invest in the stock market. But remember, the biggest risk in life is not taking any risk. If you become conservative and keep all your money in a bank account or invest all your money in the safe fund then you will lose the chance to build wealth.
No doubt people do not want to take a risk at this age and want a safe and fixed return from their money. Even the financial advisor believes that as you get older, you should reduce your investment in equity. You need to put your savings in a safe fund where the risk is very low.
Taking risk in young age is still fine, but taking a risk in old age can be very harmful. If you lose your money in the stock market during the young age, then you have a lot of time that you can recover your money from the stock market again. But if you lose your money in old age, then you do not have so much time to recover your money back.
But no one will tell you that after crossing a certain age; you should stop investing in the stock market. You can invest some portion of your earning in stocks and a major portion of your earning in a safe fund. You should reduce your exposure to equities but ignoring the equities completely is not a good idea.
You can invest in some low-risk blue-chip companies where risk is very low and there is a very low fluctuation of the stock price. You can also invest in equities through a mutual fund. Nowadays one can start investing in a mutual fund with a very little amount.
By doing this, not only will you earn fixed returns on your savings bank account and safe fund, but by investing in the stock market, your returns will increase even more.
Myth 7: You can live your life with the profits of the stock market.
It is not impossible to live your life with the profits of the stock market. But it is so difficult that it is almost impossible for most investors.
If an investor wants to quit his job to make a living from the stock market, he requires a lot of discipline, knowledge and emotional control.
You need a lot of money to invest in the stock market to survive so that the returns from your investment are sufficient to meet your day-to-day living expenses. Even if you earn a great return on your investment, but you do not have millions to invest, then you cannot quit your job.
Let us understand by an example. Suppose if you invest Rs 1,00,00,000 in a dividend stock portfolio with a 4% dividend yield, you can accumulate Rs 4,00,000 per year and also get some potential capital gains. Is that enough for you? And if this is enough for you, can your lifestyle depend entirely on stock market earnings?
If you invest Rs 1,00,000 in a dividend stock portfolio with a 4% dividend yield, you can get Rs 4,000 per year and some capital gains.
So, the basic premise is that it is possible to survive on the stock market, but it will require a lot of investment with discipline and sound investment knowledge.
Myth 8: Follow Foreign Institutional Investors (FIIs) trends.
Many times there are reports that foreign institutional investors are selling their stocks, due to which the Sensex and Nifty have declined. Similarly, when foreign institutional investors start buying stocks, the Sensex and the Nifty start rising rapidly.
Many investors get influenced by the trend of foreign institutional investors and they tend to invest in the same way the foreign institutional investors invest.
It is not wrong to follow foreign institutional investors, but it is stupid to blindly trust them.
Foreign institutional investors have a lot of money and they buy and sell stocks as per their convenience. Many times they buy and sell shares only to diversify the portfolio, to reduce the risk. Many times they buy and sell shares to earn a higher return.
The portfolio of foreign institutional investors is so diversified that even if they lose money from one stock, other stocks in the portfolio can recover that loss.
But a modest investor has neither so much money nor so much diversity in his portfolio. Therefore, investors should follow foreign institutional investors, but not blindly.
Myth 9: Invest in stocks that are trending.
There is a myth among investors that you should invest in a stock that is trending in the market. When there is only positive news about the stock and every expert recommends buying it, investors start accumulating that particular stock. Everyone starts chasing the crowd. As a result of this, the price of that share increases. Investors start buying more and more shares at a higher price in the hope that the price will increase further.
But crowd chasing is the biggest reason why investors lose money in the stock market. While following the crowd, investors forget the fundamentals of the stock market. The basic principle of the stock market is never to buy overvalued stocks. They ignore the need to do proper research before investing in the stock market.
When the initial investors start selling the stock and booking profits, the price of the shares starts to fall. At this point, investors who buy stocks at high prices get nervous and start selling their stock to minimize losses. When panic investors start selling their stocks, the situation gets worse. All of this leads to a major correction for the stock.
You should never follow the crowd before investing in the stock market and do your research.
Myth 10: Your money is safe in Blue-Chip Stocks.
For a long-term investment horizon, blue-chip stocks are always preferred by the investors. The reason is that blue-chip stocks are less risky and have very strong business fundamentals. There is a very rare chance that the business of any blue-chip companies collapse and investors will lose their money.
But there are many cases when the business of blue-chip Company collapsed and investors lost a lot of money. No one ever thought about Satyam Computers will do such a scam and the investors will lose their money.
There are many cases outside India, like General Electric, Kodak, Lehman Brothers etc. Investors never thought that these companies will fall. This proves that it is not necessary that investing in blue-chip stocks make your investment risk- free.
Myth 11: You have to take a higher risk to earn a higher return.
We’ve all heard that you have to take more risks to earn higher returns. It sounds true but it is not true.
Many stocks in the stock market that have very high volatility and are considered to be very risky stocks but unfortunately, these shares never gave high returns to their investors.
Never think that if you take high risk then you will get a high return. Many times investors are willing to take high risks to get high returns but unfortunately, they buy low-quality stocks. In this situation, they lose all their money.
There is no doubt that you have to take more risk to get higher returns. But it is also not true that you always have to take more risk to get higher returns. Before buying any stock, do your research carefully.
There are many other myths about the stock market. I mentioned some of the most common myths. If You know any other myths about the stock market then let me know. I am waiting for your reply.
Disclaimer: This article is provided for educational and informational purposes only and is not any form of individualized advice. All information is obtained from sources believed to be reliable but cannot be guaranteed for accuracy or completeness. Use this information at your own risk.