There are a lot of misconceptions and myths about stock market investing. That is why we decided to create a list of the most common investing myths you need to avoid.
People tend to think that it's all gambling and that you can't time the market. They also think that you need to own a lot of stocks to be diversified, and that percentage gains and losses are the same things.
There are a lot of investing myths out there about the stock market, and in this article, we will debunk them all.
We'll explore why people think these things, and show you why they're wrong. So if you're interested in learning more about stock market investing.
Myth 1: Investing is gambling
People often think that stock market investing is gambling. They see people making money hand over fist, and they think that it's all just luck.
While there is some element of luck involved in investing, it's not nearly as much as people think.
There are a lot of factors that go into whether or not a stock will succeed, and if you understand those factors, you can make informed decisions about which stocks to buy. Although there are risks when it comes to investing, you can lower them by staying disciplined with the fundamentals of investing.
For example, by only investing in companies that have a competitive advantage or by investing for the long term, you can mitigate a lot of the risks associated with stock market investing.
It's also important to remember that you don't have to buy individual stocks to invest in the stock market. There are other options available, like mutual funds and index funds, which can give you exposure to the stock market without the same level of risk.
So if you're worried about gambling on stocks, there are other options available to you.
Investing is not gambling
This misconception comes from a lack of understanding about what investing is. Investing is not gambling, it's about making informed decisions and taking calculated risks.
If you understand the basics of investing, you can make a lot of money in the stock market. To be fair, some people may receive this impression because there are some 'investors' who randomly buy stocks without understanding much about them.
This lack of proper due diligence is one of the most common stock market mistakes investors do.
They may get lucky and make some quick money but more often than not they will lose money.
These people give investing a bad name and create the false impression that investing is gambling. It's important to take this into account when evaluating this misconception.
However, it's also helpful to understand that skilled investors will usually make a lot of money in the long run, even if they have the occasional losing investment.
An investor's success is not based on luck, it's based on their ability to pick winning investments.
Myth 2: Market timing does not work
There can be two opposing investing myths about market timing:
- No investor can time the market
- Timing the market is easy
No investor can time the market
A common misconception about stock market investing is that you can't time the market. People think that the only way to make money in stocks is to buy low and sell high, and that's just not possible.
The truth is, timing the market can be done if you know what you're doing. Although a lot of investors still think that time in the market beats market timing, that does not mean that it can’t be done.
There are a lot of factors that go into whether or not the stock market will go up or down. Although it is difficult to predict what the stock market will do, some investors are able to do it.
They are also able to predict trends and identify certain sectors that might rise or fall beforehand.
Timing the market is easy
Another misconception about market timing is that it's possible to do and that anyone can do it. This simply isn't true. While there are people who have been successful in timing the market, they are the exception, not the rule. This is one of the most popular investing myths rookie investors have.
Most people who try to time the market end up losing money. It's nearly impossible to predict when the market will go up or down, so trying to time your trades is a recipe for disaster.
The best way to make money in stocks is to invest for the long term. Find good companies with strong fundamentals, and hold onto them for years.
Over time, the stock market tends to go up, so if you're patient, you will likely see your investment grow.
Generally speaking, saying "Timing The Market Works and Can Easily Be Done" is one of the biggest investing myths most retail investors have.
This is because 80% of traders lose money, as opposed to the 20% that are successful. Not only that, but even the most successful market timers only beat the market by a small margin. So while it is possible to time the market, it's not easy, and most people who try will fail.
Myth 3: Owning a lot of stocks is diversification
Many people think that owning a lot of stocks is diversification. They believe that if they own a bunch of different stocks, they'll be safe if one stock goes down.
However, this is not always the case.
While it's true that owning a lot of stocks can provide some degree of safety, it's not guaranteed. As you add more stocks to your portfolio there is only so much risk you can diversify.
There are also risks with over diversifying, such as:
- Related diversification: Buying stocks in the same industries and regions
You can also own a lot of different stocks all in the same industry. This would not be diversifying because if that industry takes a hit, all of your stocks will go down. For example, let's say you own a bunch of different tech stocks. If there's a recession and people stop buying tech products, all of your stocks will lose value.
- Diworsification: Buying stocks of low-quality companies for the sake of diversifying
If you own a bunch of different stocks and you add bad companies that go bankrupt, your portfolio can still take a hit. Even if you are very diversified.
Diversification is only effective if you're investing in different kinds of assets, like stocks, index funds, and REITs.
So while owning a lot of stocks can help you mitigate risk, it's not a foolproof method. If you want to diversify your portfolio, you need to be aware of the larger economic picture and invest in a variety of different asset types.
Even sometimes it is better to have a concentrated portfolio of a few stocks of companies you know in and out. With good fundamentals, a competitive advantage, and top-notch management.
Myth 4: Percentage gains are the same as losses
This is false. If you lose 50% of the stock value, you need a 100% upside just to get back to even.
Let's say you have a stock that doubles in value. Now it's worth $200. If it then falls by 50%, it will be worth $100 again.
This is why it's important to focus on absolute returns, rather than percentages. When you're looking at your investment portfolio, pay attention to how much money you're actually making or losing.
Don't get caught up in the percentage gains or losses. They can be misleading.
Myth 5: Investing is only for the rich
This is one of the most common investing myths about stock market investing. Sure, if you have a lot of money to invest, you can certainly make a lot of money in the stock market.
Even if you only have a small amount of money to invest, you can still make a decent return on your investment.
In fact, there are plenty of online brokers that allow you to open an account with as little as $100. There are also fractional shares that you can buy with as little as $1.
So don’t let this myth discourage you from getting started in the stock market. Many people that are rich investors actually started with very little money. This is one of the most misunderstood investing myths, that prevents people from starting investing.
Through intelligent investing and time in the markets, they were able to grow their portfolio to a size that now allows them to live comfortably.
Use fractional shares
Fractional shares allow for smaller investment amounts. When you hear the word “stock”, you might think that you need to have a lot of money in order to get started.
But thanks to fractional shares, this is no longer the case. Fractional shares are simply smaller portions of a whole share.
For example, if Apple stock is trading at $200 and you only have $100 to invest, you can purchase 0.50 fractional shares of Apple stock.
This allows people with limited funds to still invest in high-priced stocks and diversify their portfolios.
So if you’ve been thinking about investing but thought you didn’t have enough money, fractional shares may be a good option for you. Some stocks are expensive and if they do not offer fractional shares, it can be difficult to begin investing.
Companies are also aware of this, and they use stock splits. A stock split is when a company divides its shares into multiple smaller parts.
For example, if you own one share of Apple stock that is trading at $200, and Apple does a two-for-one stock split, you would then own two shares of Apple stock that are each trading at $100.
This can allow investors with a lower budget to invest in stocks that they may have otherwise thought were too expensive. While this misconception can seem true, it is because many people get rich by investing in the stock market. It is not because they started rich.
Over time, if you continue to invest and do not cash out, your investments will compound and grow.
Myth 6: A fallen stock is gonna go up one day
Just because a stock price falls, doesn't mean it's going to rebound and start climbing back up again. In fact, prices could continue to fall and you could end up losing even more money. This is commonly called catching a falling knife.
This can be a tough lesson to learn. Not all dips are meant to be bought and not all stocks will come back up. Some stocks are actually value traps.
When a stock price falls, it's important to take a step back and assess the situation. Is there a reason for the fall? You need to know what to do when you buy the dip and it keeps dipping.
Have any fundamental changes occurred that could impact the company's future?
If you're not sure, it's always best to consult with a financial advisor or investment professional.
Myth 7: Stocks that go up must come down, stocks that go down have to go back up
Many investors believe that stocks always go in cycles and that what goes up must come down (and vice versa). However, this is not always the case.
Reversion to the mean is an important concept that investors need to understand, but not all stocks revert to the mean.
While it is true that some stocks do tend to follow patterns or cycles, there are no guarantees in the stock market.
Just because a stock has gone up for a while does not mean it will necessarily go down, and just because a stock has gone down does not mean it will rebound.
There are bullish and bearish reversals, nothing in the stock market is a sure thing.
It is important to do your own research on each individual stock before making any investment decisions.
Some stocks may continue to go down until they are bankrupt. This can happen for various reasons.
For example, a company may have made poor business decisions, been hit with a lawsuit, or simply run out of money.
On the other hand, some investors will never invest in a stock because they are waiting for it to come back down. The problem is that they may never know when (or if) that will happen.
The stock could continue to go up and they would miss out on the potential profits.
For example, if you hesitated to invest in Amazon stock until it reached $100 again, you would have missed out on years of growth.
At this point, you may never become an Amazon stockholder. These types of investing myths are important to understand because it can impact your investment decisions.
Just because a stock goes up or down does not mean it will continue to do so.
Myth 8: Investing is too risky
Another common myth about stock market investing is that it’s too risky. Again, while there is always some risk involved in any type of investment, the stock market is not nearly as risky as many people think.
Additionally, if you are too scared of risk you will never make money on the stock market.
With a little research and knowledge, you can easily mitigate much of the risk. The main risks come from not knowing what you’re doing or investing in companies with shady business practices.
If you educate yourself on the basics of investing and only invest in well-established companies, the risks are minimal.
Publicly traded companies must disclose a lot of information about their business and financials, so you can do your due diligence before investing.
Don’t let the fear of risk discourage you from potentially earning a higher return on your investment in the stock market. You also need to understand the difference between risks and volatility in stocks.
Myth 9: Cash or bonds are safer than investing in stocks
Many people believe that cash or bonds are a safer investment than stocks. While it’s true that these investments may be less volatile, they also tend to provide lower returns.
Investing in stocks can be riskier in the short term, but over the long run, they have outperformed both cash and bonds.
From inception, the S&P 500 has returned an average of approximately 10.5%, while the value of cash has depreciated due to inflation.
Although some stocks and industries are indeed risky, it is less risky when you understand macroeconomics.
Bonds and cash
Bonds and cash have a high probability of losing their purchasing power, especially in inflationary macro environments.
While stocks can offer price appreciation, and also offer dividends which act as a hedge against inflation.
Dividends from stocks provide a safe and consistent cash flow while bonds and cash do not, which is why over the long term stocks have outperformed both cash and bonds.
This investing myth is likely driven by the fact that we hear more about stock market crashes than we do about the slow and steady gains made over time.
The media loves to report on the stock market when it’s in a free fall, but they don’t often report on the positive gains made throughout the decades.
Inflation and the depreciation of purchasing power can also be confusing concepts for some people to grasp. The number on the cash bill stays the same, so it looks like that value has remained the same as well.
However, the value of cash in terms of its ability to purchase goods and services has gone down. This has been one of the reasons for the dollar to continue to decline in value.
The illusionary effect of inflation and the psychological fear and greed of the stock markets has made this misconception a difficult one to dispel.
Despite these common investing myths, investing in the stock market can be a smart decision if you understand the risks and rewards involved.
With a little research, you can easily find stocks that fit your investment goals and objectives.
Don't let the unrealistic promise of the safety of cash and bonds stop you from seeing the larger economic picture.
Myth 10: People can lose all their money investing in stocks
While it’s true that people can and have lost all their money investing in stocks, it’s not as common as you might think. In most cases, the people who lose everything invested in stocks made some common mistakes.
They either bought into a company with shady business practices or they panicked and sold all their shares during a market crash. If you’re worried about losing all your money because someone hacked into your account, don’t be.
Online stockbrokers have implemented several security measures to protect their clients. For example, most require two-factor authentication.
While it’s true that the stock market can and does go through periods of decline, it has always recovered and gone on to reach new heights.
Even if a company goes bankrupt, shareholders usually don’t lose all their money. They may lose some, but not all.
Technically, if an investor kept buying at the top and selling at the bottom over and over again, they could lose all their money.
But if an investor diversifies their portfolio and practices patience, they will eventually come out ahead. It is rare to find an investor that makes these types of irrational trades.
So, while it is possible to lose all your money investing in stocks, it’s not as common as you might think.
Most people who lose money in the stock market do so because of their own mistakes, not because of anything inherent in the stock market itself.
Myth 11: You need lots of money to invest
We went over a similar misconception earlier, but it is essential to reiterate and explain a similar one. Investing in the stock market does not have to be an expensive endeavor.
Frequently dollar-cost averaging, you can start investing in the stock market with very little money.
Dollar-cost averaging is an investment strategy where an investor buys a fixed dollar amount instead of a number of shares of a particular security at fixed intervals.
By buying small amounts over time, the investor reduces the effects that sporadic changes, unrelated to the underlying security, might have on the price.
The key to dollar-cost averaging is to be disciplined and invest regularly, regardless of the stock market’s performance.
By investing small amounts over time, you will eventually accumulate a larger position in the security.
Myth 12: Investment fees are too expensive
One of the most common investing myths is that investment fees are too expensive. While it’s true that some investment fees can be high, there are plenty of ways to avoid them.
For example, you can invest in index funds and ETFs, which have much lower fees than actively-managed mutual funds.
You can also use a Robo-advisor, which is an online financial advisor that provides automated portfolio management services at a fraction of the cost of a traditional human financial advisor.
Finally, you can open a brokerage account with one of the many discount brokerages that have popped up in recent years. You can even have multiple brokerage accounts, to take advantage of lower fees in multiple brokers.
These firms offer commission-free trades on select securities and have much lower fees than full-service brokerages.
Myth 13: When a stock starts to decline, you need to sell
This is one of the most common investing myths about stocks. When a stock starts to decline, many people think they need to sell their shares as quickly as possible to avoid further losses.
However, this is usually not the best course of action.
First of all, it’s important to remember that some stocks are volatile by nature and will go through periods of ups and downs. If you sell every time a stock declines, you’ll miss out on the eventual rebound.
Second, if you sell when a stock is down, you may incur capital gains taxes on your profits.
Finally, if you have a well-diversified portfolio, a temporary decline in one stock will have little impact on your overall returns.
So, unless there is a specific reason to sell, it’s usually best to hold on to your shares. Additionally, if you thought the stock was a great buy at a certain price, if it goes down means you can buy it cheaper. You can average down on your purchase price.
Myth 14: If you are older there is no point in investing for retirement
This is not true! It is never too late to start investing for retirement. The earlier you start, the more time your money has to grow.
However, even if you are close to retirement age, it is still beneficial to invest. One of the best ways to do this is to max out your 401(k) or another employer-sponsored retirement plan.
If you are over 50, you can make catch-up contributions that will allow you to contribute more money than younger workers. Another option is to open an IRA account and make regular contributions.
No matter how old you are, it’s never too late to start saving for retirement. The sooner you start, the better off you will be.
You can also start investing for future generations. By building generational wealth, you can help your children and grandchildren achieve their financial goals.
Myth 15: Investing is only for greedy people
There is no correlation between being financially educated and an immoral desire for money. In fact, many of the world’s wealthiest people are also some of the most philanthropic.
Saving and investing is a key part of financial planning for everyone – not just greedy people. It also allows you to vote with your dollars.
By investing in companies that you believe are contributing to a better world, you can make a difference with your money. The stock market is a vehicle for wealth, but that does not mean that it is used to harm others or that you have to be obsessed with reaching the desired number.
You can let your investments grow and give your wealth away after decades of compounding.
Greed is a label that is often used by envious intentions. However, with the stock market, anyone can participate.
So there's no excuse not to get started yourself and be charitable to dispel these investing myths.
Myth 16: Investing is too stressful
It can indeed be stressful to watch your investments fluctuate in value. But keep in mind that the stock market is a long-term game.
Over time, the market has always gone up, so if you can stomach the ups and downs, you will be rewarded with higher returns.
One way to reduce stress is to invest in a diversified portfolio of stocks and bonds. This way, you won’t be putting all your eggs in one basket.
Another way to reduce stress is to set up automatic contributions to your investment account. This way, you don’t have to think about it every month – the money will just be automatically deducted from your paycheck.
Investing doesn’t have to be stressful. By understanding that you are not gambling and owning equity in companies, you will be more comfortable with the market's movements.
Myth 17: Stocks aren't liquid investments
It is often recommended that stocks should be held for the long term. However, that does not mean that they are not liquid investments. If you need to sell your stocks, you can do so relatively easily and quickly.
If you buy most of the large company stocks, they are liquid. There are some thinly traded stocks that are illiquid, but you want to avoid those when you start investing.
The New York Stock Exchange is open from Monday to Friday, and you can usually sell your stocks within a few days.
However, keep in mind that you may not get the same price that you paid for the stock, as the stock market is constantly fluctuating.
You may also need to pay a capital gains tax if you sell your stocks for a profit. Stocks may not be as liquid as cash, but they are still relatively easy to sell. They are also much more liquid than other assets such as real estate.
Myth 18: Being a stock investor takes too much time
There are two types of investors in the stock market: active and passive.
Active investors are the ones you typically hear about on TV or read about in magazines. They’re the people who buy and sell stocks frequently, trying to time the market.
Passive investors, on the other hand, are the ones who buy and hold stocks for the long term. They don’t try to time the market but instead invest in the future.
You don’t have to be an active investor to make money in the stock market. In fact, many passive investors outperform active investors over time.
Being a passive investor doesn’t take much time – you can set up automatic contributions to your investment account and let your money grow over time.
So there you have it – 18 common investing myths about the stock market. Don’t let these investing myths stop you from reaching your financial goals.
The takeaway from all this is that there are a lot of investing myths and misconceptions out there, and it's important to be aware of them.
If you're thinking about investing in stocks, do your research and make sure you understand what you're getting into. It's not something you should ignore as it can help ensure your financial success.