When I started investing I used to believe some of 10 stock market myths (Sucker for #9) that I will present below, you will be surprise because you might think that some of those myths are actually true!. Without further ado, lets tackle those 10 stock market myths NOW!
1 – Investing in the Stock Market is like gambling, you will lose all your money
Gambling is putting your money on a bet and hoping for the best, but when you invest in the stock market, you are buying shares of a company and while short term price fluctuations are hard (almost impossible) to predict, if a stock has been steadily going up for the past years, unless something catastrophic happens to the company, you can at least expect the trend to continue
To be honest to with you, this is a myth with a bit of truth on it, if you don’t know why you are buying the stock and what is your current plan from it, you will indeed have a hard time in the stock market. How do you avoid this? With a little bit of research!
When I’m looking for stocks to buy, I have to understand the following:
- How does the company makes money?
- Is there anything groundbreaking or is it a leader on its niche?
- Are they making money or are the finances improving over time?
- What is the current trend? Is the stock going up or down?
If I can answer all of this questions, then I will make an informed decision and buy (or not) the stock, but, if you are only buying a stock because is going up, someone told you about it or there is a lot of coverage on the media, then my friend, you are indeed gambling and I hope that the odds are on your side! 😕
2 – The Stock Market is exclusively for Rich People or you need A LOT of money to start investing
Hey! I used to believe this! How in earth I could be investing in the stock market, where all this people with fancy financial degrees and tons of money reside? I must need at least $10,000 and pass an admission test to join! 😀
As I mentioned on my youtube video, when I started investing I had only $1,000 and the reason is because I required this quantity since it was the bare minimum required to open my investing account, but there are currently brokers or applications that will let you open an account with $0 (Robinhood) or even buy fractional shares (stockpile) because not everyone can buy a full share of Amazon ( $1200 per share 😮 as December 2017)
So… you don’t even need that $1,000 that I needed to start doing it! So no more excuses!…
One thing the I have to tell you is that investing with $100 is a bit different than doing it with $10,000, as in, you should have between 1 to 3 stocks because the fees can easily make a dent on your portfolio.
3 – Unless you have Financial Degree, you should have a broker taking care of your investments
Wait… WHAT?!?! Lets analyze this stock market myth together. Do you honestly believe that someone who charges you fees for managing your stocks even if the go down and that gets paid by stock promoters to make you buy certain stocks have YOUR interests in mind when managing your funds? Really? Just because they have a nice office and a financial background?…
Although you will find AMAZING brokers that will manage your investments with your best interests in mind, the reality is that you and only YOU can make the best decisions for yourself! PERIOD!
How do you tackle this myth? There are no shortcuts, you will have to sit down and do your homework, learn the basics of investing in the stock market and how to research companies for buying opportunities. I recommend you my Stock Market 101 series to get you started
Stock Market 101 Part 1: What are stocks and more
Stock Market 101 Part 2: Stock Analysis
Stock Market 101 Part 3: Types of Stock Market Orders
Stock Market 101 Part 4: Technical Analysis
Stock Market 101 Part 5: Mindset and Psychology for success
4 – You need to be debt free in order to invest in the stock market
Ahhhh… that beautiful unicorn called “debt free”. One of the most wise things that I’ve heard regarding this myth is that “You should not compromise your financial future because of your mistakes from the past”. Yes, paying your debt has to be a priority and also investing and saving money HAS to be on that list of priorities.
It is true that paying $100 on that 21% interest rate Credit Card balance that you are carrying will save you from bigger interest fees but is also true that $100 in the stock market can grow considerably as I demonstrated on this post, spoiler alert, it can grow to be $500,000. So put everything in a balance, please keep paying your debt, but also save money to invest, your future you will be grateful for this!
5 – Everything that goes up must come down
Although this is true in Physics (nerd alert!), is not true in the stock market. A stock is not a ball that your are throwing up and has to come down because of gravity. A stock is a share of a company, and if this company has amazing fundamentals as in, is a leader on its industry, its making groundbreaking achievements or is constantly making more and more money, then unless something major happens, it will keep going up.
Just look at the 5 year chart for Amazon, Facebook and Google (among many other successful stocks). If you are waiting for those stocks to come down, then my friend, get a really nice comfy chair because you will be waiting for a while.
The image below shows the weekly performance since July 2014 for Amazon (Orange – 246%), Facebook (Blue – 167%) and Google (Red – 82%). You can click on the image for a closeup.
6 – If the media is covering the stock, then it must be a good time to buy
Nope! Please make yourself a nice tin foil hat and protect yourself from those TV waves!… Bad joke I know, sorry!
When a stock is being covered by the media, there are some things that you need to be really aware of. Stock media coverage only helps to increase market volume and probably can help to move the price, but if you got the news from the media, you are most likely late to the party.
Large institutional investment companies already know about the news and they have taken advantage of it, this means that the news are already priced in the stock by the time you hear from it (again, late to the party). Another problem with this is that the news might be old, like, really old by the time the media start covering the stock, leaving you excited with really old promising information (annnnd late to the party).
The reason why I don’t make decisions based on stock media coverage, is simply because there’s probably a Public Relations company paying the media to release the news to the masses in a more favorable tone, making it strongly biased on their opinions.
Always do your own research, don’t let others decide for you!
7 – Analysts can’t be wrong, they have done the research and have the background
Flash news! Analysts are human beings too and they can be wrong and/or biased when they make their analysis. If anyone tells you that they know exactly what the stock market is going to do, cover your ears and run fast, real fast! No one knows what the market is going to do. Also, refer to myth #6 as in, they might me getting a nice check from a Public Relations firm.
I also used to suffer from analysis paralysis and read a lot of analysis on the web, this lead me to make my decisions based on the analysis of another person, the BIG problem with this is that if the stock goes up, I would consider that I made a good choice by following their analysis, and if the stock went down, well, I lost money because of those analysts…
This is a major problem when Investing, you and only you should be held accountable for the decisions made.
8 – Higher Risk = Higher Returns
This stock market myth and the no pain no gain saying are very popular, but, I only believe the latter one up to an extent.
If you are going to buy a stock because there is a high chance of it being a big winner, but at the same time, it can flop and lose all your money, then this is not investing, this is gambling and you are better of buying a Lotto Ticket.
One of the riskiest stocks are the famous Penny Stocks, you will find stories of self made millionaires by flipping penny stocks but you will never find the thousands of sad stories of people who lost everything on Penny Stocks.
Penny stocks don’t have the same requirements as normal stocks to be listed in the stock market, this means that the company can be a scam just waiting to take your hard earned money.
Instead, look for a stock with great fundamentals and big possibilities to be a winner, if you do this, you will invest with controlled risk with a good chance for high returns.
9 – Great stocks that crashed must go up.
Any stock that has recently suffered from a nice fall on the share price is a company that you must stay away from. When a company goes through a decline in the share price that is not caused by a normal market fluctuation, it means that the fundamentals in the company has changed considerably.
A stock is not a sweater, if you go shopping on black Friday and find a sweater at 50%, you will gladly buy it because is still the same sweater, BUT, if a stock has dropped 50%, its NOT a discount sale because is no longer the same company we used to know!
Stop buying falling knifes please, it will only get messy.
10 – You can’t time the market
This one is the stock market myth that get me the most, this myth was originated by old school value/index investors and then it was adopted as a fact by the masses.
There is a reason why I love doing technical analysis and its because the stock market is a compendium of human emotions and beliefs fighting with each other every day. Share price is dictated by what buyers and sellers believe that the stock should be priced at and nothing else.
You will be a better investor and trader if you learn a little bit of market psychology and one of your tools to understand this psychology is with technical analysis. By applying the basics of Technical Analysis you will be able to find support and resistances levels of a stock and will force you to wait for the perfect opportunity to buy the stock based on your analysis.
More on stock analysis in this posts:
If you have any other stock market myths or belief please share it with us on the comment section and I will gladly answer your question.
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