CA Shefali Mundra
Are you afraid of making money in the stock market? Do you still believe that trading in the stock market is gambling, or is it the place for only people with a high-risk appetite?
Well, some of these so-called misconceptions and skepticism about losing money have significantly dominated and diluted the overall purpose of the stock market. It has debarred potential investors from utilizing the opportunity for long-term wealth creation and earning higher returns.
Counterproductive to this, people with a strong understanding of the stock market functioning and its ability to reward with multi-bagger returns have successfully distanced themselves from such petty misconceptions. Just like only a few cricket players make it to the top of the table, people who deep-dive into the world of the stock market are the ones who make it straight to the league of 'Successful investors and traders.'
Now, let's ponder upon a few misconceptions and check why we should avoid them.
1. Stock Market Aligns with the Economy.
People do believe that the stock market is like the economy. Investors and traders rely extensively on economic data and conclude the stock market trajectory. By and large, the economy and stock market work parallel, but this is only sometimes the case. Markets are extremely volatile, and the slightest incident can strongly impact the stock market but not the economy. Many factors, like changes in interest rates, tax rates, natural calamities, geopolitics, policy announcements, and more, dominate the stock market. These factors might or not impact the economy. For instance, any new announcement related to a bonus, buyback, share split, or liquidation can drastically affect the stock market rather than the country's economy.
2. Trading in the Stock market is Gambling.
In a quest to earn quick profits, trading in stock markets gets misunderstood as gambling in the stock market. In gambling, one is just playing against the odds, expecting to reach the result in their favour. Fortunately, a disciplinary approach to stock picking demarcates it from gambling. Understanding facts and figures, past performance, market trends, and profitability analysis gives traders an upper hand in making profits in the stock market.
Grab an understanding of how trading is different from gambling in this blog.
3. Invest Only in High-Yielding Stocks.
All investors and traders make their way into stock markets to make money. However, the real success lies in picking the right stocks for investment. Risk-averse investors hinge on stocks with a good dividend yield or defensive stocks. The probability of returns is dependent on some internal and external factors. Dividend or defensive stocks have a strong foothold in the market, characterized by stability but offer limited opportunity for wealth creation. Alternatively, growth stocks are relatively new to the business, characterized by high volatility but hold a high potential for capital appreciation.
To be successful in the stock market, blind selection of high-yielding stocks is dangerous, and one should avoid it. Ideally, a perfect mix of dividend and growth stocks is essential to minimize risk and generate returns.
4. Stock markets are for the Rich.
Erstwhile, stock markets were considered the space for rich people. However, with the proliferation of technology, the scenario is different. Online trading with minimal or zero brokerage has made it convenient for investors and traders. A good internet connection, an online trading account, and money are enough to start. Also, one can easily extract financial information about any company and seamlessly make real time investment decisions.
FYERS has recently launched App 2.0 and streamlined investing and trading for all. Additionally, check out Fyers MarketSmith and get the data for the last 25 years.
5. Stock Selection Based on Past Performance.
Replication of the past in the future might lead to incorrect stock selection. Inexperienced or new-age investors often get carried away by the misconception of choosing stocks based on past performance. However, past performance reflects how stocks have performed in the past, and in no way does it guarantee that they will perform the same in the future.
Although past performance is a yardstick to understand how the stock has performed in different phases of the stock market, thorough research about the company's financial performance, earnings trend, future growth prospects, and more is essential before trading or investing.
Additional read: Pick your first stocks with Fundamental Analysis!
6. Buying stocks When Prices are Falling.
'Buy the Dip' is an investment strategy often propagated to buy quality stocks when prices fall. However, investors get lured into purchasing the falling stocks in anticipation of a price rise in the future. In this case, it is crucial to understand that buying stocks at lower prices reduces the overall average price of the shares. For instance, an investor bought 100 shares of A company at ₹20 per share. But eventually, the stock price fell to ₹10, and they decided to purchase additional 100 shares, which reduced the overall average price to ₹15.
This scenario is good if the long-term price trends of the stock are positive, but this could be disadvantageous if the price continues to fall. One should clearly understand that buying is a good option if there is no change in the company's position fundamentally or if mispricing is due to a temporary market scenario.
Inexperienced or new investors often fall into the trap of baseless misconceptions. Misconceptions of the stock market are like rumors that significantly dominate investing and trading volumes across the exchanges. Buying and selling stocks based on these myths could be financially and mentally deteriorating.
Instead, one should keep pace with the trends of the market, analyze stocks based on different parameters using fundamental analysis, and strategically utilize the opportunity for wealth creation in the market.
FYERS, one of the most reliable, robust, and scalable platforms, is a perfect destination to invest and trade seamlessly in Indian stock markets.