Investing in stock markets can be a rewarding experience for investors if done in a prudent and disciplined manner. However, the market is abound with myths due to which many potential investors are wary of entering the markets. In this article we try to demyth some of the most common myths associated with investing in stock markets.
- This is a good time to invest in markets
This is the most common myth among investors. Most investors waste time trying to identify the market high or low thus trying to time their entry and exit at time when the market are low or high. But the fact remains that there is no perfect time to enter the markets as many factors influence the market movement and it is nearly impossible to predict all of them. No one can time the markets successfully and consistently over business and market cycles. So it is better for investors to invest in a staggered way and stay invested for a long time.
- If you have some knowledge then you can invest in stocks
The adage ‘something is better than nothing’ does not apply for investing in stock markets. In the stock market it is very important that you understand what you are getting into and where you are investing your hard earned money. A clear understanding of the stock/investment avenue is a must to get the optimum returns from that avenue. Never get into something in which you have partial knowledge. If you don’t have time to do your own research then it is better for you to pay and get a qualified financial advisor who can guide you through the process.
- Trading and Investing in markets is the same
Trading and Investing are the terms used often in markets and most people use them interchangeably. Although both of them are involved in buying/selling stocks, there is a huge difference between the way they perform that task by following different strategies.
Trading is buying or selling an asset for a financial benefit from that particular transaction. Trading is very short term in nature and the trader has very little interest about the long term benefits associated with holding the asset like the dividend or interest. Traders generally capture the price fluctuation of the asset in the short term due to news or events. It involves more churning of positions by the traders.
Investing on the other hand is buying shares with an intention to hold it for at least more than a year or for long term based on company fundamentals like company’s business model, financial ratios, dividend history of the company, its market share and so on.
In short, trading gives more or less instant results while investing is a strategy of creating long term wealth for investors.
- Investing in stock markets is a quick and easy way of getting higher returns
Making money in stock markets is not easy as would have been realized by most people who have entered stock markets with the lure of easy money. Investing in stock markets not only requires lot of patience and discipline but also requires research and a proper understanding of the working of the stock markets. In general, stock markets as an investment avenue are expected to provide maximum benefits over the long term. However, the risk associated with the stocks is also higher compared to other avenues. Stock markets fluctuate widely hence it is as easy to lose money as it is making money. A good strategy in choosing stocks is a disciplined approach and a proper understanding of the market movement can help in getting optimum returns from your portfolio.
- I have to diversify as much as possible to limit my risk
Agree that Diversification is an important part of managing your portfolio. Although, it won’t provide guarantee against loss, spreading your investments across various industries and sector helps in reducing price volatility. But too much diversification is not always good and sometimes can be counter productive. Over diversifying your portfolio can create problems of maintaining and tracking your portfolio. Others negative include more transaction costs (like higher DP charges, bank charges, fund manager’s fees etc), higher taxes (capital gain taxes if profits realized). Diversification limits losses but it can also limit gains. Hence it is always better to keep your portfolio simple with a collection of quality funds/assets to get maximum returns.
- One investment avenue works for all
Wrong again. Just like one size shoe does not fit all, one investment strategy which works for others may not work for you. Investment is a personalized activity and what is right for one may not be right for others. Returns from the stock market or any investment avenue are based on few factors. Key among them are your risk profile (whether you are conservative, moderate or aggressive risk taker), the type of investment avenue you have chosen, the time frame etc. For example: a well diversified equity fund with a good performance history over a long time frame and across different market cycle may be a good option for a young risk taking investor but the same can’t be a good option for a 65 year old retired investor who is seeking regular and assured income along with safety of capital.
- You need huge capital to start investing in stock markets
Wrong again. Most people think that you need lots of money to start investing in the stock markets but the fact is that most successful investors have started with very less capital. There is no minimum capital required to enter the markets, in fact it is possible to buy one share of a particular company in the stock market nowadays. Investors can invest in small sums periodically and increase their value over time.