Stock market myths: Don’t stay in the dark

Lynn Prins

Investor confidence is sometimes incredibly low as myths circulate around stock markets, leaving potential investors to question whether investing in stock is worth the hassle.

This causes uncertainty for many as there are always half-truths and falsities, such as stock markets being compared to gambling due to it being unpredictable, or that the stock markets are an exclusive club only for rich people.

If you want to find out more about stock market myths, continue reading this article as it aims at turning you into an informed investor.

Here are four stock market myths

Take more risks to get better returns

One of the most rife stock market myths is that in order to maximise your returns you need to be willing to take more risks. While a few of these high-growth, high-risk stocks do end up paying off for investors, taking more risk as a whole doesn’t always equal a greater reward.

If there is one bit of advice you could use, it would be that of Warren Buffet (business magnate, extremely successful investor and philanthropist). His entire investment revolves around minimising his risk and buying safe companies whose products practically sell themselves.

Investing in stock is just like gambling

This reasoning causes many people to shy away from the stock market. To understand why investing in stocks is inherently different from gambling, we need to review what it means to buy stocks. A share of common stock is ownership in a company. It entitles the holder to a claim on assets as well as a fraction of the profits that the company generates. Too often, investors think of shares as simply a trading vehicle, and they forget that stock represents the ownership of a company.

In the stock market, investors are constantly trying to assess the profit that will be left over for shareholders. This is why stock prices fluctuate. The outlook for business conditions is always changing, and so are the future earnings of a company.

Assessing the value of a company isn’t an easy practice. There are so many variables involved that the short-term price movements appear to be random (academics call this the Random Walk Theory); however, over the long term, a company is supposed to worth the present value of the profits it will make. In the short term, a company can survive without profits because of the expectations of future earnings, but no company can fool investors forever – eventually a company’s stock price can be expected to show the true value of the firm.

Gambling, on the contrary, is a zero-sum game. It merely takes money from a loser and gives it to a winner. No value is ever created. By investing, we increase the overall wealth of an economy. As companies compete, they increase productivity and develop products that can make our lives better. Don’t confuse investing and creating wealth with gambling’s zero-sum game.

The Stock Market is for rich people

Many market advisors claim to be able to call the markets’ every turn. The fact is that almost every study done on this topic has proven that these claims are false. Most market prognosticators are notoriously inaccurate; furthermore, the advent of the internet has made the market much more open to the public than ever before. All the data and research tools previously available only to brokerages are now there for individuals to use.

Popular products make great investments

There’s this idea that popular products will lead to great investments, however, there is some degree of truth to this. While products like Gas and Oil may be the engine of Nigeria’s economy and have made for good investments, sometimes it takes more than a great product to lead to a great investment.

A company needs to have a good management team and be able to make money in order for its stock price to advance.

With the information provided hopefully you will find yourself to be the next Warren Buffet, one never know. The future is unpredictable just like the stock markets.

Leave a Reply

Your email address will not be published. Required fields are marked *

Sign Up to our Newsletter

Sign up to our newsletter and stay up to date with the latest insurance, banking, and related news! We will bring you the latest deals so you know where you can Save time and money!

Fields marked with an * are required