There are lots of misconceptions about stock trading and the stock market out there. These will trip up investor’s success.
The saddest part about this is that these investors are completely clueless about these myths. By being aware of these myths, you’d be able to recognize them and get out from under their negative effects.
Myth #1: Winners and losers are easy to tell apart
One of the most common myths in stock trading is that a winning company is very easy to tell from a losing company. This isn’t as cut and dry as you think.
A winning company and a losing company look exactly the same. They’re in the same industry. They’re issuing similar sounding press releases. They might even be valued similarly. However, you can’t just go by their price momentum and market sentiment about them.
You also have to focus on their fundamentals. It may well turn out that during good times, one oil company is not much different from the next oil company. However, you know that when stuff hits the fan in that industry that there will be consolidation. That’s when you know that you’re holding a loser company when it turns out that it has a lot of debt, it’s reserves or stakes are not all that good.
Do yourself a favor and assume that winners and losers are hard to tell apart. This primes you to do further research. This prevents you from getting any false sense of confidence or security-based solely on a stock’s performance and short-term direction.
Myth #2: You never lose with stocks
This is a very hard misconception to shake. A lot of newbie stock investors are adamant that they will never lose with stocks. They just point to the fact that if the pay per value of their holding goes down, they only need to hang on to the stock. In their minds, this is the equivalent of not losing money.
The underlying assumption here is that you only lose if you cash out. This isn’t true. Why? If you were to invest ten thousand dollars in stock ‘A’ and as a result, fail to invest in stock ‘B’, If stock ‘A’ goes from ten dollars to eight dollars, you lost pay per value on stock ‘A’. That’s bad enough, but in your mind, you’re thinking, “Well, I just need to wait for stock ‘A’ to be worth ten bucks again, or better yet, twelve dollars, then I can safely exit.”
What if I told you that during that same timeframe, stock ‘B’ went from ten dollars to thirty dollars? That’s a loss. It’s called an opportunity cost. Opportunity costs are real in the stock market. This is the primary way you lose with stocks because you hang on to stocks that you have no business hanging on to.
Myth #3: If a stock drops, you only have to wait until it pops back up to make money off of it
Another common impression is that you only need to wait out any short-term decreases in a stocks price to profit from it. That’s not true.
You can sell the stocks short. If you think that the stock that you bought at ten dollars drops to eight bucks will continue dropping, you can actually bet against it by trading it short. This means that you borrow shares from your broker and sell it at the eight dollar point. Once the stock behaves the way you think it will, which is to drop to five dollars, you then buy back those shares. The difference is your profit.
This is how you make your money when a stock is going down. Making money in the stock market isn’t just restricted to buying low and selling high. You can also sell high and buy low.
Myth #4: Blue-chip stocks are the best way to invest
I can see why a lot of people take a lot of comfort and security from the idea that blue-chip stocks are the only way to invest. Afterall, blue-chip stocks, when times are bad, tend to maintain their value. They offer great refuge in trying times. But the problem is, when the good times return, blue-chip stocks remain in the middle of stock valuations.
If you’re looking for the best way to invest, create a portfolio that has a moderate amount of blue-chip stocks to protect against stock market crashes, but, by large, when good times return or if there’s a positive sentiment in the market, you should invest your money in growth stocks otherwise you’re losing money in terms of opportunity costs restricting your portfolio to blue-chip stocks.
Myth #5: Some stocks are just too risky
There’s a lot of investors out there that are risk-averse. They think that a stock that has very little assets is a flat-out loser. In the long term, it may be. But in terms of making money out of the stock market, it might be the biggest winner you’ll ever come across.
You have to understand that making money in stocks can take two forms. You can buy based on value. This means buying a company because you’d like to truly own it. On the other hand, you can also make money based on the short term. This is based on the market valuation fluctuation of the stock.
When you buy a stock that is risky, you are also giving yourself the chance of walking away with a big reward. As the old saying goes, “The greater the risk, the greater the reward.” So don’t worry about whether a stock is “too risky” instead, pay attention to market trends and short-term developments and use that information to make wise bets.
Myth #6: You can’t make money with a crashing market
As I’ve mentioned in Myth #3, you can make money if a stock is going up or down. The direction is not a problem. The same applies to the market as a whole. If the market is crashing, this actually can pave the way to golden opportunities if you know where to look.
Myth #7: Market stability is the key to making money with stocks
What if I told you that the more stable the market overall, the less money you’ll be making. Sure, you’ll be making increments here and there, but if you’re looking for massive movements, volatility is the name of the game.
Unfortunately, a lot of people confuse their personal finances with the stock market. Obviously, if your personal finances are stable, you feel good and optimistic. That’s not how it is. Sometimes, when there’s a tremendous amount of volatility within a stock, that stock is more attractive because you can trade it on the way up, as well as on the way down.
Myth #8: The best stocks are those with solid valuations on market caps
This goes in line with the faulty thinking I exposed in Myth #5. Just because you’re dealing with no name companies or companies that have very little assets doesn’t necessarily mean that they are losers.
Similarly, if you’re dealing with a company that has a solid market capitalization and has a golden reputation with market analyst, doesn’t necessarily mean that that’s the best stock for you.
You have to remember, it all boils down to your investment strategy and goals. If your goal is to make as much money in as little time as possible, you have to entertain all the options out there.
One of the most powerful short-term gain assets available in the market is low cap companies. These are companies that aren’t worth much money, but they can swim in value quite a bit.
Free yourself from these myths and you’d be surprised as to how much quicker you can make money off the stock market.
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