Inexperienced investors may believe some widely held misconceptions about the stock market as fact. Listed here are five common myths and the reasons why they may not be true:
The stock market is like the economy
It’s a common misconception that the stock market’s behavior should mirror the state of the economy. Investors assume that the stock market will fall in value when the economy is doing poorly. Nevertheless, the stock market is not the economy. The stock market tends to be forward looking. Investors’ expectations for the future are reflected in stock prices. As a result, the stock market tends to rise during a recession because investors believe that the economy will rebound. Stock prices do not always reflect the stock’s intrinsic value, which is one of the reasons the stock market does not always reflect the economy. A company that hasn’t yet made a profit may have investors willing to pay a premium price for its stock in order to bet on its future success. See the full list of differences between the stock market and the economy here.
You can make a lot of money day trading
Day traders lose money four out of five times, according to statistics (Business Insider Australia, 30 March 2010). One of the main reasons is that many day traders make decisions based solely on their emotions. Day traders give up their jobs in order to trade full-time and earn enough money to replace their wages. ” They are prone to making irrational decisions, such as refusing to sell a losing trade or holding on to losses for an excessive amount of time, because of the intense pressure to make money. Frequent buying and selling can reduce profits because of the high transaction costs involved. It is not uncommon for successful day traders to have accumulated a lot of experience and lost a lot of money in the process.
Investing in the stock market is like gambling
In contrast to gambling, investing in the stock market is not risky. As a result of the often binary nature of the outcome, most forms of gambling can see you lose your money immediately. Investors are unlikely to lose all of their money in a single day if they have chosen a stock that isn’t performing. Gambling, on the other hand, is a different story, as a single bad bet can cost the player their entire investment. When deciding which stocks to buy, an investor can also exert some degree of risk control. There are many companies that can be invested in that have steady and reliable earnings if an investor is more conservative. In gambling, there is no way for a gambler to control the level of risk they take because they are risking all of their money every time they bet.
Income investors should invest in high yielding stocks
There is a common belief that dividend-paying stocks are the best investments for those seeking a steady stream of income. Although income/dividend stocks do not outperform growth stocks when income and capital returns are taken into account, we can see that this is not the case. It’s common for early-stage growth stocks not to pay dividends because they prefer to reinvest their profits back into expanding their business. Since these growth stocks eventually increase their dividends, the investor benefits from both capital appreciation and an increase in annual dividends paid over time. Consequently, Income stocks, on the other hand, have maintained or decreased dividend payments, but investors may have also experienced capital losses. Growth investors have reaped the benefits of rising dividends and rising capital gains on a total return basis. Aristocrat (ASX: ALL), a growth stock, was recently compared to Telstra (ASX: TEL) in terms of total return (ASX: TLS)
Buying falling stocks is always a good idea
You may think that buying a falling stock is an excellent investment strategy because the stock is likely to be a good value for your money. As a result of this myth, a falling stock may fall even further if you manage to catch it. As a result, many investors are reluctant to buy stocks that have recently hit new highs out of fear that they won’t continue to rise in value indefinitely. Investing is all about making your money grow in value. Because of this, they need to be constantly breaking new records, or what’s the point? To keep making new highs, a company must have a good business model in place. Investors should avoid companies with falling share prices because they are likely to be bad businesses. The myth that falling stock prices always imply a reversal and an increase in price is debunked. This is due to the fact that a company that is losing money deserves a lower share price. On the other hand, a company’s stock price will rise in the long run if its earnings grow. Of course, the skill is in determining which businesses deserve to rise in the ranks and which do not.
