Myths about investing in the stock market

Amid these uncertain times, it is obvious for the first-timers to have apprehensions about investing in the stock market. And common misconceptions about the stock market act as a catalyst to our fear of investing. However, once you understand that these myths are false and overcome your fear of investing, you can also kick start your investment journey.  In this article, we’ll bust some common myths about investing in the stock market. 

Myth 1 

Trading in stock market = Gambling                  

The generic sentiment of people about trading is that it’s a gamble, either you win or lose.   

Myth Busted

Investing is more like science where you need to do proper research about the fundamentals and technicals of the securities, current market trends, and growth prospects of the company. This signifies that investing in the stock market needs thorough research and has nothing to do with gambling.

Myth 2

Past performance guarantees future returns

While making an investment decision, investors consider ratings or past performance of the stock. This is because they assume that if the stock has performed well in the past, it will in the future too. 

Myth Busted

Investing decisions are based on the future of the company and not just the historical trends. There are multiple factors that determine the growth prospects of a company. Interest rate, GDP, exchange rate, etc. are some of the major macroeconomic variables that affect the performance of the stock. And some of the micro-economic factors specific to the company that you must consider while investing are quarterly earnings, level of competition, cost of production, new product launch, change in top management, etc. 

Myth 3

Stock that comes down, will go up eventually or vice versa

Most people just can’t resist a good bargain and tend to purchase stocks that are trading at their all-time low. This is because they believe that a falling stock will eventually go up. Similarly, they also resist buying stocks that are on their all-time high, assuming that they will fall down in near future. 

Myth Busted

When a stock falls, investors need to research the reasons for the fall. Is the decline only due to market sentiment, which may reverse; or is the fall due to some significant event that may hurt the financials of the company? Also, just because a stock has seen a sharp rally, does not mean it cannot appreciate further. The reason for investing should not be biased by the rise or fall in the stock price. The buy/sell decision should always be based on a proper analysis of the intrinsic value of the stock and should align with your financial goals. 

Myth 4

You need to invest a lot of money to make money

One of the major reasons that hold back people from investing is that they assume that trading in the stock market is for the rich. This is because they have witnessed the rich get richer by investing. 

Myth Busted

The truth is that the investors need not have to invest huge sums of money to make money, but rather need to be disciplined and well-researched. Regular investing of smaller sums over a long period can unleash the power of compounding and make millionaires out of ordinary investors. Even though this may sound surprising, the fact is you can start investing with as low as Rs. 100.

Myth 5

You need to get in and get out at the right time

One of the most common misconceptions is that investors should time the market to earn good returns. They are convinced that if they invest or withdraw money in time on the basis of news or indications, they will earn good returns and be safe from facing any loss. 

Myth Busted

As the market is unpredictable, no one knows what exactly is the peak and bottom of the market. So, rather than timing the market, what you can do is look at the bigger picture before investing. When you hear the news or see any indication, you must research it and learn everything about the fundamentals of the company before investing. You should not trust any news blindly or you might end up facing financial loss. You can choose investment options based on your study and on whether you are investing for the short term or long term.

Myth 6

You need to do frequent trades to be profitable

Another thing that holds prospective investors from investing is that they think they will have to frequently trade to earn good returns.

Myth Busted

The truth is quality trades are better than quantity trades. You can do a number of trades without proper research and not earn desired returns. On the other hand, if you invest after thorough research and do quality trades, you might earn good returns. 

Myth 7

Trading stock with low P/E (Price-to-Earning) ratios is good and safe

The price-to-earnings ratio (P/E) helps to determine whether the stock is overvalued or undervalued. It is one of the most common ratios used by investors to determine the relative value of a stock. Conventional wisdom indicates that the lower the price compared to earnings (P/E ratio), the better the deal. 

Myth Busted

Choosing the cheapest stock available may also mean picking up a business with the worst growth prospect or bad present condition. There may be a good reason why the stock is trading cheap. So, you should not make your investment decision based on only the low P/E ratio. You must consider the growth prospects of the company, operational revenue, product launch (if any), debt structure, peer comparison, management, etc. So, whenever you see a stock with a low P/E ratio, you must thoroughly research the reasons behind it and invest accordingly.  

Apart from the above-mentioned myths, another common misconception is that only seasoned investors can invest in the stock market. This is not true, beginners without any knowledge of the stock market can do proper research and start investing through user-friendly platforms like Angel One. If you have not yet started investing, start today by downloading the app from here. 

Now that we have busted these myths for you, don’t let any misconception stop you from investing and taking advantage of the benefits it has to offer.