Exposing the Myths associated with the Stock Market
Updated: Oct 30, 2020
The stock market remains a mystery for many different people in our society because of its unexplained and believed superstitions. People wonder whether they should invest in stocks or not, but it's a keynote to have a better insight on investing and trading rather than blindly accepting the myths. This blog exposes some of the most believed myths and the truth behind them
The perspective of people towards the Stock Market
The majority of the populace believes that the stock market is a strange place to put one's money in it because of its surrounding myths. Research is one of the most important aspects of investing, but many end up losing their money in the stock market just by believing the myths. These myths were born in the early stages of the stock market where people faced many anomalies. It is very important to frame your investing strategy based on 'facts' rather than 'myths'. To give a flavor, the curiosity lasts until the last segment as we will be discovering the truths behind the myths and ensure that you do not fall into any of the pitfalls.
Biggest Myths about Stock Market
Reserved only for the richest
Markets always go up
Once a good company always remains to be
Only the genius can be able to invest
This is one of the key reasons for influencing fear among investors in the stock market. To expose the truth behind this, we need to clear ourselves with some definitions. Firstly, what is buying a stock? Buying stock from the market represents the ownership of a person in that company; also it entitles the person with a fraction of profit generated by the company. Secondly, why do a company's shares fluctuate? The mindset of investors is generally greedy in making profits and that's the reason for price fluctuations. The fluctuations and the stock price of a company reflect the true value of a firm and none could cheat on it. The mechanism of the stock market operates along with the mindset of investors and not by betting on prices.
On the other hand, gambling is a game where the winner takes the money from the loser. In the stock market, the situation results in a win-win situation where both the company and the investor profit from it with ownership credentials whereas, in gambling only the winner profits.
The best example would be Infosys:
Infosys established its business with an initial capital amount of 250 USD in 1993 which at present turned into a massive market cap of 46 billion USD. With addition, if a person have bought 100 shares of Infosys at 1993 since it was listed, that person would have turned into a millionaire. Comparing these situations results in a win-win situation profiting both the company and investors which is not possible in gambling.
This myth was created by people when they started comparing the risky assets in the stock market with the risk considered in gambling. Of course, a stock market is a place of risk and sudden price drops happen but the main thing is that we need to be wiser and must take actions according to the situations. To conclude, investing and accumulating profits or wealth should not be compared to gambling's zero-sum game (no addition of value or profit ). Frankly, this is one of the ridiculous myths I've ever heard.
Reserved only for the richest?
This is one of the oldest myths in the stock market. Various studies have been conducted on this topic and proven that these claims are simply wrong. To invest in stock market, it is not necessary to have a huge amount to be successful. In early days people worried about the consultancy cost which are charged for a financial advice but, in recent days it has become more common and an accessible thing for people. This change is because of the inventions of Robo-advisors which are cost-efficient and transparent in nature. These automated advisors allow people to access the stock market with a minimal investment plan.
Furthermore, the internet has given people a new shade of investment, and accessibility of data research tools has given people an opportunity to build their own investment strategies. To stress, it is really no need for you to get rich before you start investing.
"Let us be inspired by the story of Warren Buffett. He started earning money for investment as a newspaper boy and started his investment at the age of 11 with just pennies. Now, there is no newspaper without his presence in this world. If he chose to spend his lifetime waiting to be richer, he would have waited till the rest of his life".
Markets never fall!
This myth is heard by a lot of people but it's a big fallacy. Many would come across and say, "Invest in the stock market, it always goes up". Investing in the stock market is absolutely fine but, we must be prepared to accept big drops and losses from the stock market too. If stock market always tends to move up, everyone would have turned into a millionaire even a billionaire. The probability of economic recessions are more which have an equal impact on the stock market. The current scenario of the world would be the best example for this myth.
Remarkably, there are also other examples like the Subprime crisis, the crash of Japanese stock market in 1990, etc. From the perspective of investors, one should not exit the market and deposit the whole sum of money into the bank instead, being patient and wait for the market to recover would be the wiser decision.
"In India, during this pandemic period, renowned stocks like Reliance industries and Airtel fell on an average of 45% but, this was not the showstopper. Within a time frame of two months, these two companies recovered and surged with an average of 70%. This would be a clear example that people should not exit the market when the stocks are getting declined and must wait for its recovery".
Once a good company always remains to be!
This is one of the dangerous myths to be followed. This myth is possible but not in every case. It could go wrong when there is a problem with the valuation of stock prices. Sometimes, the stock prices of good companies are overvalued than its face value which will result in future loss. This is because of the greediness of people who are expecting more and more from the company. So, the shares of the company will be overbought jumping from its original value to overvalue.
"The best example would be the dotcom bubble, where people invested whole sum money with greediness into companies had their names with a .com extension but when enquired none had an online presence. As a result, big companies with online presence suffered. For instance, post this bubble, its impact affected even the huge Tech companies like Microsoft and it took years for them to recover".
"Another example would be Cafe Coffee Day. This company is one of the biggest cafe chains in India and had a remarkable reputation. It had 6.6% stake at MindTree, an IT consultancy service. Besides the company, no one ever knew that it had a huge sum of debts. Because of this, the chairman of Cafe Coffee Day, VG Siddhartha, couldn't handle the pressure given by the money-lenders and so, he committed suicide. After this incident, the company's shares declined historically low and yet to recover".
Frankly, fall of good companies are rare in our society but people must consider this as a precautionary measure and must consider these aspects for safer and better investment.
Only the Genius is able to invest
Many people are estimating themselves as they are not smart enough to invest in the stock market. To be clear, you don't need to be extremely smart to invest. People who have absolute control over their emotions are ready to set with the stock market because emotions play a vital role in investment decisions that involve your money. In fact, one's emotions can be a huge hurdle to surpass when investing. Importantly, we need not be a genius but we have to be clear with the core concepts of finance and investments also should have a better insight on how the market works. Remember that once you apt yourselves to the investing environment, you will gain comprehensive knowledge automatically through experience.
Conclusion - Getting rid of the Myths
You can see that the stock market is surrounded by myths but, it depends on people whether they are considering these are not. We must know these are just myths and to ensure ourselves to stay away from committing blunders. To be a successful investor takes time and hard work, otherwise you might end up blindly following the crowd. Sadly, many people believe that they need thousands of dollars to start investing and this reason prevents many working-class people to invest their savings.
It is important to frame your strategy strongly based on 'facts' or you will end up creating hazardous mistakes. Also, there are no age or financial status discrimination when it comes to investing. "Fight against myths and don't let it dilute you from investing in the stock market".