As much as there is wisdom and knowledge in capital markets, it also has its own share of myths and fallacies. Quite often, it is these myths and misconceptions that keep an investor from realizing the full potential of investing in equities. Here are some popular myths and here is how to overcome them.
Popular misconceptions pertaining to the stock markets among Indians.
- Unlike what you may believe, stock markets are not restricted for the rich and famous. It is as simple as buying one share of Infosys for Rs.720. That is all the money you need to start investing in equities. Thanks to demat, you can even buy 1 share of any company in the stock market. Small money can create big wealth in share markets over the long run.
- Stock market is not rocket science, but it is a lot of common sense. You just need to do it right and it is not too complicated. Ask the right questions to your broker and read up on the stock. Avoid the temptation of get-rich tips. Get familiar with charts if you want to be a trader. You will realize that it is not so complex after all.
- No, you are not too old to invest in equities at 45. The biggest risk that you are exposed to is not taking any risk in the market. If you turn conservative and put all your money in money market funds you will never generate wealth. You can reduce your exposure to equities but don’t avoid equities altogether.
- A great company is not a great stock and a great stock is not a great investment. When a company becomes very large, it is normally difficult to give aggressive returns. Infosys gave fantastic returns between 1995 and 2010. In the last few years it has struggled, so you must be willing to take the risk of quality mid caps.
- You took higher risk but did not get higher returns. That is because you got the relationship all wrong. If you take high risk and buy low quality penny stocks that will not lead to higher returns. Investing in share markets is about measured risks.
- Investing in stock markets is not like rolling dice. Spot the difference. In gambling you have no idea of the odds whereas in speculation you still have some idea of the odds. In the short run the stock markets may be a slotting machine but in the lot run it is a weighing machine. If you do solid research and hold long enough, you can still win the stock market game.
- To make money in stocks you need to buy low and sell high. Oh really! Remember what Warren Buffett said; “In the stock markets time matters more than timing”. Even if you consistently catch all the bottoms and tops, the return advantage is not much greater than a buy-and-hold strategy in equities. As well stay disciplined.
- Not all stocks that correct bounce back. They only bounce back if they deserve to bounce back. Whenever you get this idea think about stocks like Kingfisher, Deccan Chronicle, Satyam and many others which vanished without a trace. There is a difference between a quality stock correcting, a cyclical stock correcting and a worthless stock crumbling. How to invest in share markets is all about knowing this critical difference.
The stock market is normally made to be a lot more complicated than it actually is. Once you dispel these myths, you will realize that making profits in stocks is a lot more about getting the basics right. Once you add discipline to the recipe, you are on the right track!
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