Top 10 Stock Market Myths You Need to Stop Believing

Investing in the stock market can seem puzzling and a bit scary, especially with all the stories and wrong ideas out there. But don’t worry! We’re here to help you understand the real facts about investing in stocks, so you can reach your money goals without any myths getting in the way. Let’s clear up the confusion and get you on the right track in the world of investing.

The Context

One of the most common stock market myths is that indulging in the shares is like gambling — PlanB

Investing in stocks is nothing more than putting your money to work for you.

Several investors get this wrong by believing in stock market myths that are deeply rooted in our culture. This is primarily because stock investing is a distinct strategy that defies conventional ways of making money. It simultaneously amuses and fascinates a lot of people.

Such myths frequently motivate novice stock market participants, encouraging them to pursue earnings and rewards at the expense of terrible experiences. As of August 2021, there were just 1.2 crore active investors in India, according to data from the National Stock Exchange (NSE).

This equates to just 0.86% of the 138 crore people in the country actively investing in the stock markets. The main causes of this enormous difference are a lack of trust, a poor understanding of money, and market-related myths. We believe it is vital to change orthodox views about equities investment and provide a better perspective to those who unwittingly lack the attitude required here for success.

Here’s our top 10 list to dispel the most common stock market myths you have always believed in.

1. Stock Market Can Make You Wealthy

This impression comes in at number one on this list of the top 10 stock market myths. This is one of the most common misconceptions that many people have. The majority of players typically engage in market craziness to gain wealth rapidly, but this typically fails. Wealthy people nearly and certainly have some sort of connection to the stock market, but the reverse is not necessarily true.

Just like an exotic dish requires many expensive ingredients, getting wealthy requires lots of seed money to assemble wealth. When subjected to a lasting cycle of hundreds of reasonable choices, it is the seed money that ultimately churns out surplus capital for investors making them wealthy.

Please remember that buying “penny” or speculative stocks in the hopes of becoming rich quickly won’t help you do either. A stock market is a place where you can protect and grow what you already have, and that requires constant capital infusion, mental work & heavy number lifting. The stock markets hence should be viewed as a place to preserve and enhance wealth rather than as a place to become wealthy.

2. Stock Market Is Only For The Rich

The wealthy surely have an advantage in the stock market. This is due to the sheer magnitude of volumes that they engage in.

Supposedly, if you invest one lakh and make a 20% annual return on your investment, you will only make Rs.20,000 in profits to reinvest in the following year. For a high-net-worth individual, the same yield on a Rs.1 crore investment would be worth Rs.20 lakhs. The magic is clearly in the volumes and the amount of capital infusion.

But before you give up, remember that your Rs.1.2 lakh has the potential to further earn Rs.24,000 the next year, and so on, if you continue to receive the same return. This process, known as the power of compounding, is lengthy and tedious but extremely rewarding.

No matter how much money you invest in the markets and without comparing yourself to a high-net-worth investor, as long as you are getting solid returns, you are on the road to being wealthy. While it may seem obvious, consistency is the key to success in the stock market.

See the chart below to see how your capital of Rs.1 lakh from our example will grow over the next 20 years at a 20% year-on-year assumed return.

3. All Experts Are Experts

We do not deny that there are no experts in this field, but the real ones are out of the league for most common investors due to price.

For instance, Bridgewater Associates, founded in 1975 by billionaire expert investor Ray Dalio, generally requires clients to have at least $7.5 billion in investable assets to infuse into their hedge fund. Many investors pay Bridgewater at least $500,000 (about Rs.41 lakhs) a year in fees and in some cases as much as $4 million.

The reason for this is straight: Their skill attracts wealthy people who can afford it. Furthermore, Bridgewater’s flagship fund has managed an 11.4% average annual return since its inception in 1991. Now, compare that to the 1-2% annual expense ratio charged by the top Indian fund manager to manage your monthly SIPs, which themselves usually struggle to consistently beat the benchmark. Additionally, it’s a common observation these days that investors rush to follow influencers on social media who preach investing.

It’s a trend that carries a high chance of disaster.

If you can get to a publically accessible specialist, anyone can, and that just makes it ordinary. We hope you get our point.

4. Stock Market Is Pure Speculation

This stock market myth is by far the most prevalent in our society. Stock market investing in its truest sense is more than just speculation.

Investing in equities, like any other field ranging from biomechanics to engineering, is purely educational. Even trading and contracts, two legal forms of gambling that regularly draw a lot of market attention, also call for study and structured investigation.

This speculative area of the market, for instance, depends significantly on several fundamental statistical ideas, such as Kelly’s formula, that determines the optimal theoretical size for a bet on risks and rewards.

Even if studying the markets wasn’t your regular college major, it is always ideal to do so because you will end up with brand-new expertise that pays well in addition to your typical employment.

5. Trading Is The Holy Grail Of Investing

Number five on our list of top 10 stock market myths is people’s obsession with trading.

Trading is not investing.

Stock markets are primarily intended to help businesses raise capital for growth and expansion. As a result, the primary goal of value investing in stocks is to participate in the growth of some of the most profitable brands in our lifetime.

Holding a few good stocks in your portfolio entails riding them through thick and thin. The notion of trading as the best way to participate in the game has now transformed the Trading and options market into the world’s largest casino.

Trading and options are simply forms of stock market participation in which your decision should be based solely on your willingness to take risks. The only catch is that if you don’t consistently assess your risks and rewards, you’ll lose money much faster than you would when investing.

Real investing should normally be the first step in an investor’s lifecycle, followed by stock trading and options trading only if essential.

6. Buying Stocks Means Investing

This vague idea comes in at number six on our list of the biggest stock market myths. This may come as a surprise to you, but simply purchasing some stocks is also not the same as investing.

Stock investing, like trading, is merely a segment of your overall investing strategy.

A financial portfolio is a collection of investment tools such as shares, mutual funds, bonds, cash, real estate, gold and so on that are chosen based on an investor’s income, budget, and investment time frame. When and how much you invest in each instrument is a fine balance that requires years of trial and error or the assistance of a finance professional.

This equilibrium usually involves some unique and individual factors such as age, risk appetite, disposable income, responsibilities, and financial goals to design the allocation of capital. When in doubt, only consult SEBI-registered finance professionals.

7. Market Tanks In A Crash

The news would often say —

“Investors lose Rs.14 lakh crore as the market tanks”

These headlines serve only as clickbait to increase target rating points (TRP) and readership. The profits and losses you observe in the market are referred to as “paper losses” and are not real.

Paper loss is the value of an investment that appears in accounts, but that does not involve a real loss of cash.

The shares do lose value during shocks, but the loss is still regarded as unrealized as long as they are not sold. Once the economy starts to do better, decent stocks always make a comeback.

While inflated prices and high valuations may be reduced during shocks, the intrinsic worth of a company’s stock will not be diminished as long as its asset position remains unchanged. So this is why every value investor places great emphasis on the idea of fair price and the necessity of valuation analysis.

8. All Great Stocks Face Major Corrections

Number eight on our top 10 stock market myths is a crazy idea that many amateur investors hold to be true. They assume that it is preferable to wait for corrections before investing in strong equities that are showing greater highs.

Numerous remarkable businesses with solid business practices have disproved this misconception. If a company has strong fundamentals, its stock price will rise along with the expansion of its operations. Even amid wars, pandemics, and other crises, these stocks persistently exhibit this bullish tendency.

While they occasionally face panic revisions, it is impossible to predict that a good stock will drop below half or a quarter of its fair price.

This anomaly is caused by the ability of these businesses to recognize real-world elements that consistently maintain demand for their services and goods, such as inflation, population growth, and technological advancements.

9. Money-Making Formula Is Real

Many investors squander a lot of their time to find the Holy Grail of investing. The Holy Grail of investing, in our opinion, is an investment that offers large returns with zero risk.

A lot of learned people are aware that there is no such investment. But given how much they want one, they continue to feel the urge to look for one. And occasionally, irrationality, passion, and hope triumph over reason and logic.

Nuances derived from technical analysis are undoubtedly an important part of your overall investing strategy, but it is not the end goal that leads to the magic formula. Never forget that investing is a lifestyle and not a task that can be completed at will.

10. It’s Too Late To Start Buying Stocks

Many people think that investing in equities at a later stage of life is a bad idea. Keep in mind that as long as you have the time and patience to ride out market volatility, you can buy stocks at any age.

The trick is to choose the stock and the quantity based on your level of risk tolerance. You can acquire stocks at any age as long as your investment venture doesn’t put you in financial difficulty.

Conclusion

Publicly traded businesses have led the way in innovation and ways to generate significant profits. According to the Gallop survey, 145 million adult Americans, or 56% of the population, hold stocks.

However, due to several myths and ideas propagated by self-proclaimed experts who abuse the sanctity of this wonderful subject of academia, this participation is insignificant in India. Stock investment is a respectable approach to wealth accumulation if it is carried out correctly with passion and ethics.

Nevertheless, Indian investors need to stop viewing the stock market as a gamble or a mysterious unicorn. Instead, it ought to be viewed as a way to participate and profit from the expansion of the publicly traded businesses that fuel our economy.

We hope that this post dispelled some widespread misconceptions that deter many people from investing in the stock market. Do share your ideas in the comments with us so we can make our future content even better and more valuable to you.

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Invest wisely!