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Common Stock Market Myths

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  • Common Stock Market Myths

    A variety of myths prevail in the stock market and these are enough to beguile any investor, but it is important that one keeps a realistic view of stock market. Let us bring into light some common stock market myths that generally dominate common minds.

    People believe that investing in stock market is almost akin to gambling. This myth keeps a lot of serious investors away from the stock market. But what people forget is that while investing in stocks, people are taking well informed decisions by buying legitimate securities of companies that give them partial ownership of those companies.

    Another prevailing myth is that the stock market is for the privileged few, the brokers and a handful of rich people, who can manipulate it to play in their favor. But this is absolutely not true as no power can claim to influence the stock market wholly. On the contrary, with the advent of Internet, stock market has now reached the general masses more than ever before. Company data are now open to public scrutiny. Actually, individual investors are nowadays more powerful than institutional investors as they are not bound by time constraints and can afford to play long term.

    The belief stock prices that go up will definitely come down and vice versa is also a myth. There are companies that continue to create value for both shareholders and customers and have continuously seen new highs. On the contrary, there are infinite examples of company shares falling down from sky-high positions and eventually the companies have gone out of business thus bankrupting all their shareholders.

    It is also a myth that one can start investing in the share market with little or no knowledge. Stock market is not about choosing shares blindly and playing by luck. There are data that have to be collated and analyzed and charts and graphs that have to be studied carefully. It is advisable to invest in share market on the basis of well informed decisions. The better informed you are the better are the chances that you will succeed.

    It can be easily assessed whether a stock is cheap or expensive by its price to earnings ratio. This fact is absolutely a myth. PE ratios are most listed in newspapers and published in public media regularly as it is easy to calculate. It is not possible to know about company fundamentals from PE ratios and they tell us nothing about a stock's value.

    It is said that you should sell stocks on their way up and buy stocks on their way down. It is the general belief that rising stocks are expensive and hence it is not to be bought at that time but it must be remembered that rising stocks are of some value which increase their worth in the market and hence can be a good choice for investment. And stocks should never be held without selling when on the downside in the hope that it would rise again and would give the opportunity to have the profit originally intended. Falling stocks might still fall abysmally low and might retain their low position for indefinite period. Hence it is wiser to sell off those stocks when they start their downward journey before the losses start hurting acutely.

    It is also a widely prevalent myth that young people can afford to take higher risks. This statement is absolutely false as risk taking ability has very little to do with age and more to do with the mental makeup of the investor concerned. How much risk a person can take also depends on what percentage of his income or capital he is putting at stake and also on his future and past financial planning, his lifestyle, his savings, his profession, source of income, etc.

    In order to make substantial profits in the stock market you need to take huge risks. This is another very common myth clouding the mind of investors in general. Rather it is always wise to adopt strategies to minimize your risks while investing in the stock market. There are ways like maintaining a diversified portfolio, allocating only a specified amount of the entire investment capital in stock market, conducting research and studying various data and other stock market tools before choosing a stock, etc. to manage risks.

    There are surely many other existing myths related to stock market investment. But the fact remains that investing through stock market is increasingly gaining popularity worldwide and hence the number of floating myths are also continuously on the rise. One should just ignore such myths and take well informed and pre-meditated investment decisions.

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