This is a collaborative post by Rosanna Beechum about the stock market and the myths and misconceptions.
While most people are aware of the main market indices and have some vague idea of what stocks are, for many, the inner workings of the stock market remain a complete history. This leads outsiders to form their own theories about it and why they should or shouldn’t invest. But unless you have real knowledge of stock investing, it can be easy to believe those myths and be apprehensive about the market in general. In this article, we’re going to dispel some of the biggest myths and misconceptions about the stock market.
5 Myths and Misconceptions about the Stock Market
The Stock Market is a Form of Gambling
This is probably one of the biggest reasons why people shy away from the stock market in the first place. But that is a clear misunderstanding of how stocks work. Simply put, when you buy stocks or shares, you’re actually becoming an investor in that company and now own a part of it. It entitles you as an owner to a part of the profits and a claim on assets. Too many people assume that stocks are just a vehicle for trading and too often forget that they actually represent ownership.
From this point, it’s easy to understand why trading and owning stocks has little to do with gambling. The way a stock or company performs is not dictated by pure chance, but factors that can be easily monitored. While in part, the price of a stock can be dictated by speculation on future earnings, an underperforming company will not be able to fool investors forever. While the price fluctuations of a particular stock may seem random at times, stocks should represent the present value of future profits it will make.
Only Rich People and Brokers can make Money from the Stock Market
This outdated notion harkens back to the days when information on the stock market was very scarce and only brokers had access to real-time information. But today, the role of brokers has been greatly diminished and investors can get all the information they want on any publicly traded stock or market around the world at the touch of a button.
Trading is not as costly anymore either. Discount brokers nowadays allow you to make trades for a fraction of what it used to cost. And with the introduction of new financial products like CFDs, investors can speculate on various exchanges without even having to actually own shares and stocks. CFDs are also very easy to access and allow you to make money whether the markets are going up or down. Brokers like Pepperstone allow you to trade CFDs for as little as £120 and you’ll be able to use leverage trading to control much larger assets than what you actually put in. If you want more information about Pepperstone and what they offer, you can check out this Pepperstone review by InvestinGoal. The site also reviews other brokers, to help you make a smart investment decision.
Falling Stocks will Eventually Rise Back Again
That is one of the most destructive ways of thinking for new investors and one of the reasons so many end up getting burned. If given a choice between a stock that was at £80 last year and fell to £20, and a small stock that rose from £5 to £10 in the same period, you’d be surprised at how many people would think the first one would be a better deal. But the price is only a small factor in investing. The goal should be to find great companies that are currently undervalued, not buying cheap stocks of a major company in hopes that it bounces back.
What Goes up Must Come Down
At the opposite end of the spectrum, you have people who believe that the laws of gravity also apply to a stock. Those would probably be the same who wouldn’t have invested in Berkshire Hathaway when stocks rose from $7,455 to over $17,250. Those who did, however, are having the last laugh since shares are now worth over $300,000. While it is true that stocks sometimes undergo corrections based on market conditions, there is no reason to believe that a great firm with good leadership won’t continue to grow.
You can Start Trading with Little Experience
While it is true that getting started with investing is easier than ever because of all the information that is now available, you should take the time to learn everything there is about stock markets and investing in general before you make the jump. If you’re eager to start, then we strongly suggest that you consult an advisor first. The cost of working with one will far outweigh the risk of investing in something that you don’t fully understand yet.
Now that we hopefully were able to dispel those myths about the stock market, it’s time for you to start educating yourself and get some real information on how the markets actually work. Make sure that you find an advisor or a community that will be willing to guide you and start small so you can learn through trial and error while limiting risk.
Rachel is an Austin blogger, educator, mom, wife, young breast cancer survivor writing about health, saving money, and living a happy life in Austin, Texas.
Rachel has written for HuffPost and Hometalk and has been featured on KXAN, Studio 512, Fox 7 Austin, and CBS Austin.