5 Common Misconceptions about Stock Market Investing

Many people avoid Investing in Stocks because of these 5 Myths. Let me clear a few things up...

5 Common Misconceptions about Stock Market Investing.

In this post, I’d like to clear up a few common myths about markets that scare most people away from ever getting involved.

1. Markets crash all the time!

    You only lose money if you sell the shares or if the firm goes bankrupt. 

    If a share price falls a huge amount, which happens quite often, the value of your investment goes down. But you only lose if you sell the shares at a lower price than where you bought them. Most of the time, the shares will recover and proceed higher than before. 

    Markets don't really crash, they ‘correct’. This happens for multiple reasons, but normally it is correcting an error in the pricing. When people see prices rising fast, they experience FOMO (Fear of missing out!) which entices them to invest, and that pushes the price higher. Those that currently own the shares don't want to sell, because they think it will be more valuable tomorrow. And those that dont own it, now want it even more, and fear it will cost more tomorrow. This self-fulfilling cycle pushes prices higher, and after a while the prices being asked lose all connection to the actual value of the shares. Eventually, the market realises, and then prices fall. Similarly, as the prices drop, owners decide to try to get out and sell the shares, but nobody wants to buy them as they will be cheaper tomorrow.

    2. Investing is only for rich people.

      This is simply untrue. In fact, investing creates rich people!

      In the past there was an element of truth to it, because brokers insisted on a minimum deposit just to allow you to open an account, and that deposit could be as much as $10K, but that was in the past. 

      The competition for customers is so intense now, that not only can you start with as little as $5, but many brokers charge zero commissions on trades. 

      3. It's difficult to make money on the stock market. 

        Not true. Markets go up much more often than down. Why do they go higher? Because every day a profitable company opens for business, they add a little to the value of the company. (Even though the market might not reflect that value straight away). If you buy and hold shares of solid companies, it is actually very easy. The difficulty comes in ignoring the swings, and holding for the long term.

        4. You need to pay a broker to advise you about your investments.

          That is a myth. In today's online world, you can access research for free from millions of sources, and if you have the education, you can access the actual financial statements from the company. They are all available online, for free, to everyone. They have to publish it, It's the law!

          5. You need to spend hours doing research. 

            That is perhaps true if you want to only invest in the very best companies, but there are thousands of companies that you can invest in, where would you start? 

            The truth is that if you look around your home, you will see dozens of brand names that are a good investment, all you need to ask is “will they be around in twenty years, or is it a fad”.

            After that, you must diversify, I personally started by investing across 10 different companies, this then grew to over 25. Now I own shares in more than 50 companies, and I will likely grow that list further, as new technologies get created and become part of our everyday lives.

            In 2021 I spent about 45 minutes managing my portfolio. Passive is an understatement!

            The safety is in diversification (that means lots of different companies). Putting all your eggs in one basket leaves no room for error. Putting everything you have into one stock would be crazy, because all it takes is a bad manager to spoil the reputation of even the finest company. 

            I must emphasise the point on diversification. I bought shares in some companies that went out of business. Gone. Wiped out. Money lost. 

            Do I weep every time I think about those stocks? Absolutely not, because they were a very small part of my portfolio. They may have taken 1% or 2% from my investment capital, but those losses are more than covered by the stocks that were successful. 

            To summarise, investing is an amazing way to grow wealth, if you can leave it for the long term. That is not 1 year or 2 but 10 to 15 or more, the power of compounding works spectacularly, but it takes time. Have a look at the following figures to see how time is much more important than you think.

            You can see here that adding 50% more time (from 20 years to 30 years) will double the returns.

            Long term investing is a very easy way to create passive income, the world will go to work everyday, thereby adding another day's productivity to the pot. Whether or not you own some of that wealth is up to you and nobody else.

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